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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In the first sign of the impact of tighter lending practices by banks, investor loans showed a sharp 6 percent drop in value in February, along with a fall in home loan demand, according to a senior economist with a leading bank. 
New data from the Australian Bureau of Statistics show that not only the number of new loans ease modestly in the February, but the value of all loans also fell, said Savanth Sebastian, senior economist at CommSec.
The Real Estate Institute of Australia (REIA) also confirmed the view, saying the latest ABS data shows finance approvals for investor housing is moderating.
“The value of investment housing commitments increased by a modest 0.7 per cent in February in trend terms and decreased by 5.9 per cent in seasonally adjusted terms. This is down from its 2015 peak”, REIA president Malcolm Gunning said.
“It is still early days but data over the next couple of months will be more telling,” added Sebastian on the fall in investor borrowings.  
All the major banks have put brakes on investor loans or refinancing of investment property mortgages, in addition to higher interest rates for investors, in line with the prudential regulator APRA’s guidelines to cool a heated property market. 
“The average loan size recorded a fall of almost $10,000 in February. In fact over the past two months the average loan balance has fallen by over $22,000 or 6.2 per cent,” said Sebastian.  
“The recent shift by the banking sector in regards to loan serviceability may have played a part. It should be noted that the average home loan is also influenced by home prices, composition of borrowers and the geographic location of home purchases.”
He said the Reserve Bank was correct in its view that conditions in the housing market are very mixed. There is a healthy pipeline of work, with owner occupiers likely to dominate home building and buying. The value of loans to build new homes stood at a just under $2.9 billion – easing modestly from the record high of $3.3 billion in March 2016. 
The latest Housing Finance data found 54,816 home loans were written throughout the month of February, down from 55,099 written the month prior.
“After three consecutive months of growth in home loan approval numbers, we saw a decrease in February,” said Mortgage Choice chief executive John Flavell.
But he added that January and December are “notoriously strong months” in terms of home loan demand and there is generally a drop off in home loan approvals come February.
In February 2017, $32.9 billion worth of home loans were approved, down 2.7% on the previous month, but up 0.3% on February 2016.
Of the $32.9 billion worth of home loans approved over the month of February, $19.9 billion were for owner-occupied loans, while $12.9 billion were for investment purposes.
Looking ahead, Flavell said recent investment policy and pricing changes by many of Australia’s lenders could cause this type of home loan demand to tumble. 
“Over the coming months, we expect to see lending for investment housing to decrease because a lot of Australia’s lenders are making changes in this space,” he said.
“In recent weeks, we have seen a number of lenders tweak their investment pricing, with some increasing their interest rates by as much as 39 basis points across some of the investment products."
In addition, some lenders have removed themselves from the investment lending space altogether, whilst others have tweaked their policy and made it clear that they will only lend to certain types of investor customers, he added.
"All of these changes will ultimately have an impact on the level of investment activity and investment loan approvals,” said Flavell.
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prateek24-ezbwHMbNAk

Bank tightening sees investor loans fall a sharp 6 percent in February: ABS data

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GUEST OBSERVER
The RBA’s decision to leave the cash rate unchanged today came as no surprise. 
The competing forces of below target inflation and soft employment growth against rampant property markets in Sydney and Melbourne mean policy is on hold for the foreseeable future. 
The most interesting feature in the Governor’s Statement today was the second last paragraph, which was new. The entire paragraph was devoted to a discussion on lending for housing. The Governor noted that growth in household borrowing to purchase dwellings, “continues to outpace growth in household income”. And that, “a reduced reliance on interest-only housing loans in the Australian market would be a positive development.” 
Lowe’s comments come in the wake of APRA’s additional supervisory measures, announced last Friday, to address risks that continue to build within the mortgage lending market. The new rules will limit new interest only lending to 30% of new lending (currently ~40%) and limit the number of loans with high LVRs. At the margin, the changes should cool investor-related demand for housing, but not sufficiently so to put a rate cut back on the table. 
The Governor is a little more downbeat on the labour market, noting that, “some indicators of conditions in the labour market have softened recently.” The February labour force data (published two weeks ago) showed employment contracted over the month and the unemployment rate lifted to 5.9%. As such, the March data (due 13 April) takes on added significance because another weak employment report would see the RBA’s forecasts for jobs and wages growth tested. 
The rest of today’s Statement contained only cosmetic changes compared with the March Statement.
<a href="https://www.propertyobserver.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.38.45%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.38.45%20AM.png" alt="">
The outlook 
The consistent message from the RBA over the past two months has been that rate cuts are off the table. Very strong dwelling price growth and growing concerns around the level of household debt mean that the cash rate is unlikely go lower unless there is a sustained loss of momentum in job creation. 
Of course the debt burden faced by households would be lessened with lower rates. But the historical experience in Australia has shown that debt has risen as a share of income as rates have fallen. Further rates cuts at this point would simply encourage more borrowing that would ultimately go into bricks and mortar. That said, we very much doubt that the RBA would use its main policy lever to slow activity in the housing market while inflation is below target and spare capacity in the economy is elevated. It would be a very unusual move if it did, particularly given the latest round of supervisory measures announced by APRA. 
The market is pricing in a non-trivial 41% change of a rate hike within the next 12 months. But we cannot make or see the case for policy to be tightened. As such, we continue to expect the RBA to be on hold over 2017 and well into 2018. 
Gareth Aird is economist at Commonwealth Bank and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/gareth-aird/14/790/905">here</a>.
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jchancellor-FAypfDUnLy

RBA on hold and neutral bias reaffirmed: Gareth Aird

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<div class="column">GUEST OBSERVER</div>
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<div class="column">The Australian economy is very much a Curate’s egg at present – it is good in parts. Manufacturing is doing well and business conditions generally are favourable.</div>
<div class="column"> </div>
<div class="column">But consumers are more cautious. Retail spending is soft while job markets are mixed, as are housing markets. So as you would expect the Reserve Bank is a little more considered when discussing the position of the Australian economy.</div>
<div class="column">
 But the Reserve Bank is by no means downcast, rather it is probably a little disappointed that the economy is largely marking time.</div>
<div class="column">
 The Reserve Bank sets policy by looking at where inflation is going to go. Inflation is still tipped to move above 2 per cent so clearly the Bank won’t be cutting rates any time soon. Housing has dominated the commentary. The Reserve Bank has added its voice to the need for lenders to be careful in assessing the serviceability of loans. And the Bank believes it would be positive if there was less reliance on interest only loans for home purchase.
Perspectives on interest rates</div>
<div class="column"> </div>
<div class="column">The Reserve Bank has left the cash rate at 1.50 percent. The previous move was a rate cut in August 2016 (25 basis points). There have now been 12 rate cuts since November 2011, with the Reserve Bank cutting rates from 4.75 percent to 1.50 percent. The Reserve Bank had previously lifted rates seven times from October 2009 to November 2010 – a total of 1.75 percentage points, from 3.00 per cent to 4.75 per cent.
What are the implications of today’s decision?</div>
<div class="column"> </div>
<div class="column">The next move in interest rates is still more likely to be a rate hike than a rate cut. But in our view, policy is unlikely to change over 2017, so any rate hike is some way off.</div>
<div class="column"> </div>
<div class="column">The Reserve Bank believes inflation will push into the 2-3 per cent target band. And economic growth is expected to lift over the year. Add in the fact that home prices are recording solid gains in many capital cities and it seems clear that rate cuts are off the agenda.</div>
<div class="column"> </div>
<div class="column"><a href="https://www.propertyobserver.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.22.52%20AM.png" target="_blank">Click to enlarge</a></div>
<div class="column"><img src="https://www.urban.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.22.52%20AM.png" alt=""></div>
<div class="column">
 Then there is the global environment. Global economic growth has improved and deflationary risks have receded. The US is lifting interest rates. And there are early signs that the Euro zone will reduce stimulus later this year. So the global environment supports the domestic policy leaning.</div>
<div class="column">
 The Reserve Bank is expected to maintain its neutral  policy stance for now. Inflation is still low, economic indicators are more mixed and the higher Australian dollar is acting as a modest cap on economic growth.</div>
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<div class="column">The Reserve Bank will especially watch the following in coming months: the upcoming French presidential election; US fiscal policy (the flagged tax cuts); Chinese economic activity; commodity markets; Australian home prices; inflation expectations; and the local job market.</div>
<div class="column"> </div>
<div class="column">We expect the Reserve Bank to stay on the interest rate sidelines for the 2017 year. </div>
<div class="column"> </div>
<div class="column">Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.</div>
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cjames-5S2v74qSNK

Reserve Bank softens its views on the economy: Craig James

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GUEST OBSERVER
The RBA provided no surprises following its April board meeting leaving the official cash rate on hold at 1.5 percent.
The RBA remains more confident regarding global growth, sees Australian economic growth as moderate, regards the labour market as being mixed, sees a gradual rise in underlying inflation and continues to see conditions in the housing market as varying considerably across the country, but sees recent regulatory measures as reducing the risks associated with high and rising household debt.
This note looks at the outlook for the cash rate, the impact of bank rate hikes and the implications for investors.
RBA likely on hold well into 2018
Our assessment is the cash rate has probably hit bottom after falling from 4.75% in 2011 to a record low of 1.5% last year and that the next move will be a rate hike but not until second half 2018. Another rate cut looks unlikely because:
<ul>
<li>economic growth is okay – having bounced back in the December quarter after a temporary slump;</li>
<li>national income is up from its lows thanks to higher commodity prices;</li>
<li>the RBA expects underlying inflation will gradually rise;</li>
<li>the Sydney and Melbourne residential property markets are uncomfortably hot with prices up 19 percent and 16 percent respectively over the last year and 75 percent and 50 percent respectively over the last five years posing financial stability risks if prices and household debt continue to rise.</li>
</ul>
By the same token it’s too early to be thinking about hikes as unemployment and underemployment at over 14 percent are way too high;
<ul>
<li>this is maintaining downwards pressure on wages growth which is at record low of 1.9 percent year on year (in terms of the historical record for the Wage Price Index); </li>
<li>the $A remains too high and is up from January last year;  </li>
<li>underlying inflation risks staying below target for longer –  reflecting low wages, the rise in the $A and competition;  </li>
</ul>
There are risks around economic growth as the contribution  to growth from home building is likely to slow this year and retail sales growth is weak at a time when mining investment is still falling; and bank “out of cycle” mortgage rate hikes have delivered a (“modest”) de facto monetary tightening any way.  The RBA has to set interest rates for the average of Australia so raising interest rates just to slow the hot Sydney and Melbourne property markets would be complete madness at a time when overall growth is still fragile, underlying inflation is well below target and property price growth elsewhere is benign or weak.
<a href="https://www.propertyobserver.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.06.41%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.06.41%20AM.png" alt="">
The best way to deal with the hot Sydney and Melbourne property markets and excessive growth in property investor lending into those markets is through tightening lending standards, which APRA has just moved again to do.  By the second half of 2018 the drag on growth from falling mining investment is likely to have ended, stronger global growth should have started to help Australian growth and stronger employment growth should have started to benefit full time jobs and wages and the threat around below target underlying inflation should have subsided. All of which should allow the RBA to start raising interest rates. But on current indications it’s hard to justify RBA rate hikes before then.  
But what about bank out of cycle rate hikes?  
The banks have recently raised rates for property investors and on interest only loans by around 0.25% and for principal and interest owner occupier loans by around 0.03%. The stated drivers were higher funding costs (presumably following the back up in global bond yields over the last six months) and regulatory pressure to slow lending to investors and higher risk borrowers. More moves may lie ahead if global borrowing costs rise further but again would be focussed on investors &amp; interest only mortgages and in the absence of RBA rate hikes are likely to be small as only 20-30% of bank funding is sourced globally. But it’s worth putting “out of cycle” moves in context:
 The RBA is still in control. “Out of cycle” bank moves have been a regular occurrence since the GFC and yet this did not stop mortgage rates falling to record lows in response to RBA rate cuts. As can be seen in the chart below the virtually fixed 1.8% gap between the standard variable mortgage rate and the cash rate only applied from 1997 to 2007, prior to that the relationship was far less stable so “out of cycle” moves are nothing new. The chart shows that changes in the cash rate remain the main driver of mortgage rates. If the RBA wants to lower mortgage rates again it can just cut the cash rate till it gets the mortgage rates it wants. 
<a href="https://www.propertyobserver.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.08.16%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.08.16%20AM.png" alt="">
  So far the changes in owner occupier rates are unlikely to have much economic impact because 3 basis points is trivial compared to the 200 basis point rise in mortgage rates that occurred in the 2009-10 monetary tightening cycle. So don’t expect much impact on consumer spending albeit there is negative psychological impact.
Changes in investor rates have less impact on spending in the economy because they are tax deductible and investors are less sensitive to rate moves. That said investor rates have gone up by around 0.52% compared to owner occupier rates since 2015 and this will eventually have some dampening impact on investor demand.
House prices
While strong population growth means that underlying property demand remains strong, the threats to the hot Sydney and Melbourne property markets are building: more macro- prudential measures to slow lending to investors and to more risky borrowers have been announced; the banks are raising rates out of cycle particularly for investors; the May budget is likely to see a reduction in the capital gains tax discount; all at a time when the supply of units is surging; and home prices are ridiculous. Taken together these moves are likely to result in a significant dampening impact on home price growth. 
<a href="https://www.propertyobserver.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.11.05%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.11.05%20AM.png" alt="">
We continue to expect a significant cooling in price growth in Sydney and Melbourne this year followed by 5-10% price falls commencing sometime in 2018 after the RBA starts to hike rates. By contrast Perth and Darwin are getting close to bottoming (as the mining investment slumps nears its low) and other capital cities are likely to see continued moderate growth. Unit prices are most at risk given the increasing supply of units.
Will rate hikes crash the economy?
There seems to be a view that household debt is now so high that any hike in interest rates will cause mass defaults and crash the economy. This is nonsense. Yes household debt is up but not dramatically since the GFC and interest payments as a share of household disposable income are at their lowest since 2003. Mortgage rates would need to rise by nearly 2% to get the interest servicing ratio back to its most recent 2011 high - which slowed but did not crash the economy. And most Australians are ahead on their debt payments. 
Finally, the RBA will move gradually when it does start to raise rates and knows households are now more sensitive to rate moves and so it probably won’t have to hike rates as much as in the past to cool any overheating in the economy.
<a href="https://www.propertyobserver.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.12.12%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/4/Screen%20Shot%202017-04-05%20at%208.12.12%20AM.png" alt="">
Implications for investors
There are several implications for investors. First, bank term deposit rates are set to remain very low. As a result, there is an ongoing need to consider alternative sources of income. Second, be cautious of the Sydney and Melbourne property markets, particularly units. Third, remain a little bit wary of the $A as an on hold RBA at a time when the Fed is likely to hike rates another two or three times this year could put downwards pressure on the $A.
So retain some exposure to unhedged global shares. Finally, with low interest rates growth assets providing decent yields will remain attractive. This includes unlisted commercial property and infrastructure but also Australian shares which continue to offer much higher income yields relative to bank term deposits.
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<a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author" target="_blank">SHANE OLIVER</a> is head of investment strategy and economics and chief economist at <a href="https://www.ampcapital.com.au/home" target="_blank">AMP Capital</a> and is responsible for AMP Capital's diversified investment funds. 
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Can’t see an official rate hike until second half 2018: Shane Oliver

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GUEST OBSERVER
As universally expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50 percent.
As we anticipated in our preview, two key changes are prominent in this month’s statement by the Governor.
Firstly, the commentary around the domestic economy is somewhat less upbeat. The growth performance is described as “ongoing moderate growth.” In particular the commentary around the labour market is downbeat. It is recognised that some indicators of conditions in the labour market have softened recently; the unemployment rate has moved a little higher and employment growth is modest. The forward looking indicators continue to be pointing to continued growth in employment although the use of the words “still point” provides some hint that the Bank is less committed to that prospect. Further, the Governor notes that “wage growth remains slow.”
Considerable attention is given to the housing market. While the theme that conditions vary markedly around the country is maintained the Governor speaks for the first time around “the risks associated with high and rising levels of indebtedness.” The minutes to the March meeting referred to “a build-up of risks associated with the housing market” and today’s statement just emphasises the Bank’s concern in this regard. In the March statement the Governor noted: “supervisory measures have contributed to some strengthening of lending standards.” In this statement he significantly raises the bar and asserts that: “lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions … [including] a reduced reliance on interest only housing loans.” This is a much more direct statement setting the scene for expected further pressure on the banks from the regulators.
As has been the case in previous statements the currency is quoted as “an appreciating exchange rate would complicate this adjustment.”
Conclusion Since August last year we have argued consistently that rates will remain on hold over the course of 2017 and 2018. We do expect that macro prudential and banks’ self-regulatory policies will be successful in taking most of the heat out of the housing market over the course of the remainder of this year. Even though spare capacity is expected to persist in the labour market and low wage and inflation conditions remain the Bank will not opt for further policy easing given the risks of reigniting house prices.
With Australian interest rates steady and US rates continuing to rise (two Fed hikes expected this year) supplemented by a turnaround in commodity prices the stimulus required for the domestic economy is likely to come through a more competitive Australian dollar than lower interest rates. 
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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RBA holds rates steady, more concerned about the labour market: Bill Evans

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At its April meeting today the Board decided to leave the cash rate unchanged at 1.50 percent. They have been unchanged since last August.
The board warned growth in household borrowing, largely to purchase housing, continues to outpace growth in household income.
"By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions.
"A reduced reliance on interest-only housing loans in the Australian market would also be a positive development," it noted.
Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.
 
CoreLogic head of research Tim Lawless said it was widely anticipated the Reserve Bank would keep the cash rate on hold, adding the RBA would be loath to push rates lower out of concern for adding further fuel to an already over heated housing market.
"They aren’t likely to push rates higher just to quell housing market exuberance; doing so could push inflation lower and the Australian dollar higher as well as cancel out some of the much needed stimulus that many sectors of the economy are benefitting from," he said.
"On the other hand, the RBA would be loath to push rates lower out of concern for adding further fuel to an already over heated housing market.
"With the cash rate likely to remain on hold, at least for the remainder of the year, it’s looking increasingly like other factors will be necessary to undertake the heavy lifting required to bring about a housing market slowdown. 
"Mortgage rates have been rising despite the steady cash rate, which will act as a disincentive to market demand. 
"The combination of higher mortgage rates, as well as firmer policy settings from APRA around investment lending, more scrutiny from ASIC on lending behaviour and tighter internal lending policies for the banking sector are likely to take some heat out of investment demand. 
"Additionally, market driven factors including high apartment supply, record low rental yields and affordability constraints should gradually contribute to slower housing market conditions. 
"If the housing market continues to accelerate despite these combined factors, there is a very high likelihood of further policy announcements that will more firmly muffle investment demand. 
Importantly, policy makers don’t want to dent investor demand so severely that unit settlements are adversely affected.  With more than 150,000 units currently under construction nationally, much of this new unit supply will be reliant on investor demand to be absorbed. 
"If lending conditions are too strict for this sector of the market, the risk of investors not being able (or willing) to settle will be heightened."
The vast majority (37 of 38) of experts and economists from the finder.com.au RBA survey accurately tipped the cash rate would remain unchanged today.
Some 86 percent of the 36 experts who opted in to this question believing the next rate move will be up; this has risen from 68 percent of panelists last month.
Graham Cooke, Insights Manager at finder.com.au, said out-of-cycle rate hikes have characterised the home loan market in recent months.
“It’s likely that some time will lapse before the Reserve Bank increases the cash rate so banks have taken matters into their own hands," he said.
“This year, out-of-cycle rate increases have become the norm with several banks raising rates for both variable and fixed products."
"When asked about recent out-of-cycle rate hikes, most experts and economists (69 percent) believe these hikes will allow the Reserve Bank to hold off for longer before adjusting the cash rate.
“While recent independent rate rises have been unpopular with homeowners, it’s likely the banks have given the RBA breathing space to hold out longer before making a move.
“We’re expecting the Reserve Bank to stay in it’s ‘wait and see’ mode for the foreseeable future,.
Seven out of 10 experts and economists think Sydney and Melbourne aren’t currently in a property ‘bubble.’
Shane Oliver from AMP Capital said “Yes, the Sydney and Melbourne property markets are overvalued, hot and unsustainable but this does not mean a 20% plus generalised crash is inevitable.”
When experts were asked about the top issues they’d like to see addressed in this year’s budget, housing affordability was the number one issue.
What finder.com.au experts had to say:
 Jordan Eliseo, ABC Bullion (Hold): "The RBA has made it clear they are reticent to cut rates further, despite economic conditions that we'd characterise as soft on the whole."
Shane Oliver, AMP Capital (Hold): "Underlying inflation risks staying below target for longer and the Australian Dollar is too high, but growth is ok. National income is rising and the Sydney and Melbourne property markets are too hot. So best to stay on hold."
John Hewson, Australian National University (Hold): "There’s Insufficient evidence of the economy slowing and they’re waiting for the Budget"
Alison Booth, Australian National University (Hold): "I think the RBA will hold the cash rate owing to the stability of the key macroeconomic indicators."
Darryl Gobbett, Baillieu Holst (Hold): "RBA has more concern about the systemic issues with higher debt likely to result from lower interest rates than it sees benefits from lower interest rates."
Richard Robinson, BIS Oxford Economics (Hold) : "Although domestic economy is still weak and the Australian Dollar is tracking too high, the overheating residential property market precludes a cut to rates. A rate cut would help put downward pressure on the Australian dollar.”
Michael Blythe, CBA (Hold): "[Current issues include] low inflation and housing concerns." Savanth Sebastian, CommSec (Hold): "The RBA is comfortable how the economy is evolving.
Rate cuts are not on the agenda and inflation remains contained."
Dr Andrew Wilson, Domain Group (Hold): "No real case for change this month, steady as she goes but economy still needs work - and Budget looming."
Saul Eslake, Economist (Hold): "Notwithstanding the most recent labour force data, which were disappointing, there is no compelling reason for the RBA to think that its most recent forecasts need to be revised down, or that monetary policy settings need to be eased further. On the contrary, the recent renewed strength in property investment lending is a strong argument against further easing - even if it doesn't constitute a case, on its own, for an immediate tightening."
Dr Mark Brimble, Griffith Uni (Hold): "The economy is still struggling to gather momentum with employment weakening and inflation lack luster. Confidence is also below trend. Financial Institutions have also been raise rates out of cycle and thus have increased pressure on the economy."
Peter Haller, Heritage Bank (Hold): "There is nothing in the underlying economic data to justify a change in rates."
Shane Garrett, Housing Industry Association (Hold): "The bank will see no pressing need for an interest rate change at this stage. Economic growth is performing reasonably well in most areas and inflation is not yet a threat."
Alex Joiner, IFM Investors (Hold): "No compelling shift in data or outlook justifies rates being kept on hold."
Robert Montgomery, Infrastructure Partnerships Australia (Hold): "The RBA will wait for more movement in underlying economic indicators."
Michael Witts, ING Bank (Hold): "No drivers have been identified that would suggest that the RBA is looking at changing the absolute level of the cash rate in the immediate period ahead."
Nicholas Gruen, Lateral Economics (Hold): "It's been telegraphed and they don't like changing rates unless they feel obliged to."
Leanne Pilkington, Laing+Simmons (Hold): "Not enough has changed in an economic sense since the RBA met in early March. The main indicators suggest any increase in rates in the near term could put undue pressure on markets and consumers."
Lynne Jordan, Liberty (Hold): "Household debt levels, low wage growth, active property investors and a weak inflationary environment still present a major policy challenge for the RBA. I don’t think we’ll know exactly when the RBA’s next move will be until CPI data comes out at the end of April. If Inflation has gone up, we lean closer towards the rate increase many economists have predicted. But if it is the same or lower, the RBA will likely hold the cash rate and remain in the same predicament it has been for the past few months – that investors will continue to make the most of low interest rates and drive up prices, which could result in household debt levels increasing even further."
Matthew Tiller, LJ Hooker (Hold): "There has been little discernible change[to] economic indicators since the last RBA meeting. GDP has rebounded, inflation remains soft and employment growth has kept ticking over. The east coast housing markets remain strong and continues to be of concern to the RBA, especially when factoring the recent rises in mortgage rates from the majority of banks. These factors combined should see the RBA hold rates steady this month and over the short term."
Stephen Koukoulas, Market Economics (Hold) : "It has an unhealthy emphasis on Sydney and Melbourne housing which is preventing it from cutting interest rates."
John Caelli, ME (Hold): "Risks to house prices outweigh concerns about low inflation in the short term"
Michael Yardney, Metropole Property Strategists (Hold): "Underlying economic growth, though a little better than the previous quarter, is still weak but the RBA can't cut rates because of its concern regarding the strength in the Melbourne and Sydney property markets"
Mark Crosby, Monash University (Hold): "The well telegraphed Fed rate rise is consistent with more normal US growth, and outside Europe and Japan the global environment is reasonably benign. The case for a rate rise is not yet strong enough to justify moving rates up, but further Fed rises later this year should lead the RBA to consider increasing rates in H2."
Emily Dabbs, Moody's Analytics (Hold): "Inflation pressures are starting to build, but the domestic demand remains constrained by high underemployment. The central bank is keeping a close watch on the hot housing property, and further easing is unlikely while household debt continues to grow strongly. "
Jessica Darnbrough, Mortgage Choice (Hold): "I think the Reserve Bank will once again take a wait and see approach to interest rates. At present, there is nothing in the global or domestic economies that would push the Board to change their current stance on monetary policy. "
Christopher Schade, MyState Bank (Hold): "The hurdle for another cut is high. While inflation remains subdued, and the outlook for economic growth over the next year couple of years slightly below trend, interest rate settings in Australia are very accommodative and remain appropriate at their current level."
Alan Oster, NAB (Hold): "[The RBA is] still watching."
Jonathan Chancellor, Property Observer (Hold): "No need for any decision but hold. This year has seen continued upwards pressure on Sydney and Melbourne house prices, but standby for a shift given the continued regulatory measures and out of cycle bank rate hikes."
Matthew Peter, QIC (Hold): "The hot state of the housing market will keep the RBA from cutting rates, while the tepid recovery in the economy and lack of wage growth and core inflation will keep the RBA from raising rates - RBA on hold through 2017 and the first half of 2018."
Noel Whittaker, QUT (Hold): "No reason to move either way."
Janu Chan, St.George Banking Group (Increase): "The RBA is needing to balance a mixed outlook for the domestic economy and risks in the housing market. It suggests that the RBA will likely remain on hold in coming months."
Steven Milch, Suncorp (Hold): "Low inflation is being balanced by sound growth and a buoyant property market."
Brian Parker, Sunsuper (Hold): "Little change in the growth or inflation outlook from the previous meeting."
Clement Tisdell, UQ-School of Economics (Hold): "No indication from the governor of the Bank of a change."
Nicki Hutley, Urbis (Hold): "RBA does not want to exacerbate house price growth." Bill Evans, Westpac (Hold)
Christine, Williams (Hold): "[The] employment rate has stayed the same with a mixture of casual and part time work employment No new full time work offered. Resources have not increased. With Cyclone Debbie's aftermath and the expectation of food rice increases this would not be the month to increase rates."
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Less interest-only would be positive development: RBA warns as it holds rates again at April 2017 meeting 

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Statement by Philip Lowe, Governor: Monetary Policy Decision
At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 percent.
Conditions in the global economy have improved over recent months. Both global trade and industrial production have picked up. Labour markets have tightened in many countries. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by higher spending on infrastructure and property construction. This composition of growth and the rapid increase in borrowing mean that the medium-term risks to Chinese growth remain. The improvement in the global economy has contributed to higher commodity prices, which are providing a significant boost to Australia’s national income.
Headline inflation rates have moved higher in most countries, partly reflecting the higher commodity prices. Core inflation remains low. Long-term bond yields are higher than last year, although in a historical context they remain low. Interest rates have increased in the United States and there is no longer an expectation of additional monetary easing in other major economies. Financial markets have been functioning effectively.
The Australian economy is continuing its transition following the end of the mining investment boom. Recent data are consistent with ongoing moderate growth. Most measures of business confidence are at, or above, average and non-mining business investment has risen over the past year. At the same time, some indicators of conditions in the labour market have softened recently. In particular, the unemployment rate has moved a little higher and employment growth is modest. The various forward-looking indicators still point to continued growth in employment over the period ahead. Wage growth remains slow.
The outlook continues to be supported by the low level of interest rates. Lenders have recently announced increases in mortgage rates, particularly those paid by investors. Financial institutions remain in a good position to lend. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.
Inflation remains quite low. Headline inflation is expected to pick up over the course of 2017 to be above 2 per cent. The rise in underlying inflation is expected to be a bit more gradual with growth in labour costs remaining subdued.
Conditions in the housing market continue to vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Growth in rents is the slowest for two decades.
Growth in household borrowing, largely to purchase housing, continues to outpace growth in household income. By reinforcing strong lending standards, the recently announced supervisory measures should help address the risks associated with high and rising levels of indebtedness. Lenders need to ensure that the serviceability metrics that they use are appropriate for current conditions. A reduced reliance on interest-only housing loans in the Australian market would also be a positive development.
Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.
Philip Lowe's statement was first published on <a href="https://www.rba.gov.au/media-releases/2017/mr-17-07" target="_blank">The RBA website here.</a>
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Borrowing outpacing household incomes: RBA Governor Philip Lowe's April 2017 statement

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GUEST OBSERVER
Coupled with an unexpected rise in the domestic unemployment, low inflation, and a dearth of other economic news, the CAMA RBA Shadow Board remains convinced that the cash rate should remain at its current level. 
It attaches a 54 percent probability that this is the appropriate setting. The confidence attached to a required rate cut equals 3 percent, while the confidence in a required rate hike equals 43 percent.
Inflation remains at 1.5 percent, well below the Reserve Bank of Australia’s official target of 2-3 percent. 
Australia’s seasonally adjusted unemployment rate unexpectedly rose to 5.9 percent in February of 2017 from 5.7 percent in January, according to the Australian Bureau of Statistics. The consensus forecast was 5.7 percent. This number will be closely watched by the markets and policy makers. The increase in unemployment was due entirely to a reduction in employment, in particular part-time employment, as the participation rate was unchanged. There is no new data on wages growth, which remains subdued.
The Aussie dollar, relative to the US dollar, has still not broken out of its narrow range near the 76 US¢ mark. Likewise, yields on Australian 10-year government bonds are also range-bound, around 2.7 percent, as are domestic share prices.
Globally, both the OECD and the IMF agree that economic growth is likely to remain tepid for a while longer. This concern was echoed by US Federal Reserve chair Janet Yellen who remarked that, “we cannot rule out the possibility expressed by some prominent economists that slow productivity growth seen in recent years will continue into the future.” While there is some positive news coming out of Asia, as trade volumes are increasing, Brexit and a volatile Trump presidency continue to put investment in a holding pattern.
Elevated house prices and the world’s third highest household debt and debt servicing ratios will continue to weigh on the RBA’s mind as the possibility of a painful price correction, with all its implications for the macroeconomy, cannot be easily dismissed.
The Shadow Board continues to prefer to hold interest rates steady but its confidence that this setting is appropriate has weakened somewhat, from 59% in March to 54 percent. It attaches a 3 percent probability (4 percent in March) that a rate cut is appropriate and a 43 percent probability (37 percent in March) that a rate rise, to 1.75 percent or higher, is appropriate.
The probabilities at longer horizons are as follows: 6 months out, the estimated probability that the cash rate should remain at 1.50 percent equals 20 percent, three percentage points down from the previous round. 
The estimated need for an interest rate decrease has fallen from 9 percent to 6 percent, while the the probability attached to a required increase equals 74% (68 percent in March). 
A year out, the Shadow Board members’ confidence that the cash rate should be held steady equals 16 percent (down from 17 percent in the previous three months), while the confidence in a required cash rate decrease has waned from 7% in March to 4% and in a required cash rate increase grown from 76 percent to 81 percent.
<a href="https://www.propertyobserver.com.au/images/2017/04/4/Screen%20Shot%202017-04-04%20at%209.38.16%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/04/4/Screen%20Shot%202017-04-04%20at%209.38.16%20AM.png" alt="">
 
To read the release in full, visit the RBA Shadow Board's website <a href="https://cama.crawford.anu.edu.au/rba-shadow-board" target="_blank">here</a>.
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Rates should stay on hold as banks start to move: RBA Shadow Board

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The majority of experts and economists believe the RBA is likely to hold the cash rate at 1.5 percent ahead of this afternoon's meeting, according to a survey by finder.com.au.
The majority of experts (80 percent, 24) said the idea of first home buyers accessing their superannuation to help with a property purchase would be ‘irresponsible’.
Some 37 of 38 experts and economists polled for the survey are expecting the Reserve Bank to hold the cash rate for April 2017 and 70 percent of those who gave detailed predictions (34) indicating a rise will not take place until 2018 and 86 percent of the 36 economists who weighed in on this question forecasting the next rate move to be an increase.
This is up from 68 percent of panelists in March and 58 percent in February.
Graham Cooke, finder.com.au insights manager, says mortgage holders should brace themselves for rising interest rates. 
“The cash rate hasn’t shifted in recent months, but it’s now becoming clear that the next move will be in a positive direction as the Bank starts to tighten monetary policy," he said.
“Variable rate mortgage holders should brace themselves and revise their household budget to ensure they can cope with higher mortgage repayments.
“This could mean consolidating personal debt or cutting back on household expenses such as utilities or groceries,” he says.
"Enabling first home buyers to dip into their super funds could interfere with retirement planning.
“Allowing young Australians to access their super to facilitate a property purchase could jeopardise their future as it may mean they don’t have enough funds to cover living expenses once they hit retirement age.
“Additionally, this could add fuel to the fire by creating further demand for housing, thereby ballooning property prices."
In a low interest rate setting, experts were asked if some borrowers may have overborrowed for properties, and the responses were varied.
“Some first home buyers may have bitten off more than they can chew which could be an issue with rising rates. However, disciplined budgeting and a clear repayment schedule will help borrowers manage their debt effectively.
“APRA’s recent move to tighten mortgage rules combined with recent bank rate hikes, targeted mostly at investors, are likely to cool the flourishing housing market. 
“In particular, APRA’s decision to limit the flow of new interest-only lending to 30 percent of new residential mortgages will have change the market drastically. Currently, interest-only loans account for 39 percent of lending."
Here’s what finder's experts had to say: 
Jordan Eliseo, ABC Bullion (Hold): "The RBA has made it clear they are reticent to cut rates
further, despite economic conditions that we'd characterise as soft on the whole."
Shane Oliver, AMP Capital (Hold): "Underlying inflation risks staying below target for longer and the Australian Dollar is too high, but growth is ok. National income is rising and the Sydney and Melbourne property markets are too hot. So best to stay on hold."
John Hewson, Australian National University (Hold): "There’s Insufficient evidence of the economy slowing and they’re waiting for the Budget"
Alison Booth, Australian National University (Hold): "I think the RBA will hold the cash rate owing to the stability of the key macroeconomic indicators."
Darryl Gobbett, Baillieu Holst (Hold): "RBA has more concern about the systemic issues with higher debt likely to result from lower interest rates than it sees benefits from lower interest rates."
Richard Robinson, BIS Oxford Economics (Hold) : "Although domestic economy is still weak and the Australian Dollar is tracking too high, the overheating residential property market precludes a cut to rates. A rate cut would help put downward pressure on the Australian dollar.”
Michael Blythe, CBA (Hold): "[Current issues include] low inflation and housing concerns." Savanth Sebastian, CommSec (Hold): "The RBA is comfortable how the economy is evolving.
Rate cuts are not on the agenda and inflation remains contained."
Dr Andrew Wilson, Domain Group (Hold): "No real case for change this month, steady as she goes but economy still needs work - and Budget looming."
Saul Eslake, Economist (Hold): "Notwithstanding the most recent labour force data, which were disappointing, there is no compelling reason for the RBA to think that its most recent forecasts need to be revised down, or that monetary policy settings need to be eased further. On the contrary, the recent renewed strength in property investment lending is a strong argument against further easing - even if it doesn't constitute a case, on its own, for an immediate tightening."
Dr Mark Brimble, Griffith Uni (Hold): "The economy is still struggling to gather momentum with employment weakening and inflation lack luster. Confidence is also below trend. Financial Institutions have also been raise rates out of cycle and thus have increased pressure on the economy."
Peter Haller, Heritage Bank (Hold): "There is nothing in the underlying economic data to justify a change in rates."
Shane Garrett, Housing Industry Association (Hold): "The bank will see no pressing need for an interest rate change at this stage. Economic growth is performing reasonably well in most areas and inflation is not yet a threat."
Alex Joiner, IFM Investors (Hold): "No compelling shift in data or outlook justifies rates being kept on hold."
Robert Montgomery, Infrastructure Partnerships Australia (Hold): "The RBA will wait for more movement in underlying economic indicators."
Michael Witts, ING Bank (Hold): "No drivers have been identified that would suggest that the RBA is looking at changing the absolute level of the cash rate in the immediate period ahead."
Nicholas Gruen, Lateral Economics (Hold): "It's been telegraphed and they don't like changing rates unless they feel obliged to."
Leanne Pilkington, Laing+Simmons (Hold): "Not enough has changed in an economic sense since the RBA met in early March. The main indicators suggest any increase in rates in the near term could put undue pressure on markets and consumers."
Lynne Jordan, Liberty (Hold): "Household debt levels, low wage growth, active property investors and a weak inflationary environment still present a major policy challenge for the RBA. I don’t think we’ll know exactly when the RBA’s next move will be until CPI data comes out at the end of April. If Inflation has gone up, we lean closer towards the rate increase many economists have predicted. But if it is the same or lower, the RBA will likely hold the cash rate and remain in the same predicament it has been for the past few months – that investors will continue to make the most of low interest rates and drive up prices, which could result in household debt levels increasing even further."
Matthew Tiller, LJ Hooker (Hold): "There has been little discernible change[to] economic indicators since the last RBA meeting. GDP has rebounded, inflation remains soft and employment growth has kept ticking over. The east coast housing markets remain strong and continues to be of concern to the RBA, especially when factoring the recent rises in mortgage rates from the majority of banks. These factors combined should see the RBA hold rates steady this month and over the short term."
Stephen Koukoulas, Market Economics (Hold) : "It has an unhealthy emphasis on Sydney and Melbourne housing which is preventing it from cutting interest rates."
John Caelli, ME (Hold): "Risks to house prices outweigh concerns about low inflation in the short term"
Michael Yardney, Metropole Property Strategists (Hold): "Underlying economic growth, though a little better than the previous quarter, is still weak but the RBA can't cut rates because of its concern regarding the strength in the Melbourne and Sydney property markets"
Mark Crosby, Monash University (Hold): "The well telegraphed Fed rate rise is consistent with more normal US growth, and outside Europe and Japan the global environment is reasonably benign. The case for a rate rise is not yet strong enough to justify moving rates up, but further Fed rises later this year should lead the RBA to consider increasing rates in H2."
Emily Dabbs, Moody's Analytics (Hold): "Inflation pressures are starting to build, but the domestic demand remains constrained by high underemployment. The central bank is keeping a close watch on the hot housing property, and further easing is unlikely while household debt continues to grow strongly. "
Jessica Darnbrough, Mortgage Choice (Hold): "I think the Reserve Bank will once again take a wait and see approach to interest rates. At present, there is nothing in the global or domestic economies that would push the Board to change their current stance on monetary policy. "
Christopher Schade, MyState Bank (Hold): "The hurdle for another cut is high. While inflation remains subdued, and the outlook for economic growth over the next year couple of years slightly below trend, interest rate settings in Australia are very accommodative and remain appropriate at their current level."
Alan Oster, NAB (Hold): "[The RBA is] still watching."
Jonathan Chancellor, Property Observer (Hold): "No need for any decision but hold. This year has seen continued upwards pressure on Sydney and Melbourne house prices, but standby for a shift given the continued regulatory measures and out of cycle bank rate hikes."
Matthew Peter, QIC (Hold): "The hot state of the housing market will keep the RBA from cutting rates, while the tepid recovery in the economy and lack of wage growth and core inflation will keep the RBA from raising rates - RBA on hold through 2017 and the first half of 2018."
Noel Whittaker, QUT (Hold): "No reason to move either way."
Janu Chan, St.George Banking Group (Increase): "The RBA is needing to balance a mixed outlook for the domestic economy and risks in the housing market. It suggests that the RBA will likely remain on hold in coming months."
Steven Milch, Suncorp (Hold): "Low inflation is being balanced by sound growth and a buoyant property market."
Brian Parker, Sunsuper (Hold): "Little change in the growth or inflation outlook from the previous meeting."
Clement Tisdell, UQ-School of Economics (Hold): "No indication from the governor of the Bank of a change."
Nicki Hutley, Urbis (Hold): "RBA does not want to exacerbate house price growth." Bill Evans, Westpac (Hold)
Christine, Williams (Hold): "[The] employment rate has stayed the same with a mixture of casual and part time work employment No new full time work offered. Resources have not increased. With Cyclone Debbie's aftermath and the expectation of food rice increases this would not be the month to increase rates." 
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No rate cut and first homebuyers accessing super to buy property is ‘irresponsible’, experts say

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GUEST OBSERVER
The Reserve Bank Board meets next week. It is certain to keep rates on hold. The minutes of the March board meeting were less upbeat on the economy than we had seen in previous assessments.
While I was meeting with customers and officials in Asia, my colleagues assessed the minutes as "The overall theme is still of upside risks from global growth and commodity prices near term but a likely muted pass through to local conditions and question marks beyond 2017".
Readers will be aware that our central theme for the Australian economy has been for slightly above trend growth in 2017, partly reflecting the boost to the terms of trade and the ongoing construction boom, to be followed by an abrupt slowdown in 2018 as construction contracts and the terms of trade reverse.
With the Reserve Bank sharing our caution around 2018, along with ample capacity in the labour market (unemployment rate is 5.9% compared to full employment rate of 5.0%) and stubbornly low wages growth, there is only scope to cut rates. But as we have argued consistently, a resurgent housing market disallows such a policy option. Indeed, the minutes refer to “a build- up of risks associated with the housing market”. A tighter macro prudential stance seems appropriate.
Indeed, as we go to press, APRA has announced new controls, restricting the "flow of new interest-only lending to 30 per cent of total new residential mortgage lending" with a particular focus on limiting interest only loans with a loan-to-value ratio above 80%.
Currently, "interest-only terms represent nearly 40 per cent of the stock of residential mortgage lending by ADIs", so this policy will restrict the terms at which a marginal borrower can access credit (investors and owner-occupiers). APRA also noted that they want banks to manage growth in investor credit to "comfortably remain below the previously advised benchmark of 10 per cent growth".
This is not a hard change to the target as had been mooted recently in the press (some suggesting the 10% limit could be as much as halved), but it does suggest lending to investors will continue to grow at a pace meaningfully below 10%.
Looking ahead, the next RBA Stability Review (April 13) may provide more clarity on the macro prudential policy outlook and potential triggers for further action. For the time being though, the 2015 experience offers an understanding of the potential impact of this further tightening.
Figure1 shows the slowdown in house price appreciation that came as a result of curtailing investor loan growth to 10% in 2015. Those direct controls on lending volumes were complemented by interest rate adjustments by the banks themselves.
Figure 2 shows our estimate of the changes in the weighted average of the variable mortgage rate (including investors and owner occupiers) in 2015. We estimate that during that period, the weighted average rate lifted from 5.44% to 5.71%. Of course, that lift was more than fully offset by subsequent rate cuts by the RBA in 2016, pushing the weighted average rate down to 5.34%.
As we see in Figure1, that cut re-ignited house price growth as well as auction clearance rates and new lending.
The RBA has already been given a “start” in this current cycle, with the weighted average rate lifting from 5.34% to 5.51%, largely reflecting increases in investor rates by the four majors. 
<a href="https://www.propertyobserver.com.au/images/2017/03/31/Screen%20Shot%202017-03-31%20at%2010.08.19%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/03/31/Screen%20Shot%202017-03-31%20at%2010.08.19%20AM.png" alt="">
Complementing these rate adjustments with a more constraining restriction on new lending to investors (as well as to owner occupiers for interest only loans) is likely to yield a comparable response in house prices as 2015.
By year’s end, the RBA’s concerns with “a build- up of risks associated with the housing market” are likely to have eased.
As we move into 2018, despite ongoing rate hikes by the Federal Reserve, the Reserve Bank, troubled by low inflation; on-going spare capacity in the labour market; and weak wages growth might be tempted to ease policy further.
However, the “lessons” of 2016 will have been learnt – do not risk re-igniting house prices – and a more prudent approach will be to rely on the currency to provide the boost to activity.
From our perspective, a reversal of the commodity price boom of 2017, coupled with Australia’s cash rate falling below the US, is likely to yield a sharp lift in Australia’s competitiveness. 
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BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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