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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GUEST OBSERVER
Australia has experienced a period of strong demand for commercial property which has led to firming yields and high prices.
There is still a substantial amount of investment capital looking for opportunity but the lack of availability of suitable stock has led to a reduced volume of transactions during 2016. Most property markets are, or are close to being, fully valued.
Going forward, rising bond rates and slow to moderate economic growth will have an impact on property markets. As growth stays below long term trends, and rates rise, prices will soften.
In this type of environment, leasing conditions will re-emerge as the primary driver of property outcomes. The key question is the extent to which growth in net effective rental income will offset the negative impact of rising interest rates on yields.
Cyclical factors will have a greater influence on prices in office property markets than that of rising interest rates on yields. The key is to invest in strong leasing markets with prospects for strong rental growth.
Sydney remains the pick of the markets. Demand has been improving moderately but with development virtually stopped and stock availability declining due to the Metro rail project and increased residential conversions, falling vacancy rates have meant strong rises in effective rents as leasing incentives reduce.
Vacancy rates are forecast to be less than 5% for the next three years, driving further rises in net effective rents and property prices. However, strong capital growth over the last year has reduced prospective returns. There are still opportunities for investment, and this is the phase where repositioning, major refurbishment or new developments can generate returns, but each opportunity needs to be examined on its own merits.
Last year, demand for office space was moderate in Melbourne. But, unlike Sydney, there has been plenty of development to satisfy requirements. In the short term, Melbourne will be hit by a weakening of demand as it absorbs the loss of the remaining car manufacturers and many associated suppliers, as well as a slowdown in residential construction.
Once that shock is absorbed, however, Melbourne will recover. It still retains many of the advantages—notably cheap land for residential, commercial and industrial property—which gave it a competitive advantage over Sydney in the provision of back-office services for national operations. Melbourne office demand will grow slightly more strongly than Sydney in the next decade but rent and property value growth will be inhibited by the plentiful availability of sites.
The Brisbane economy is still suffering from the continuing loss of demand from mining services. In the boom, 25% of Brisbane’s office space was occupied by companies servicing mining. Demand will be hit further when the inner Brisbane apartment market turns down.
Medium term, the prospects are good as Brisbane will benefit from strengthening activity in tourism, education services and agriculture. The short term will be difficult due to the existing oversupply of office space with little prospect of a substantial improvement in demand to absorb it. The vacancy rate is currently above 15 percent and will still be above 10 percent at the end of the decade.
The Perth economy is collapsing under the weight of the end of the mining boom. Investment has further to fall and the economy will stay weak for some time. During the boom, half of Perth office space was occupied by companies servicing mining. Much of that demand is now gone and the vacancies will take a decade to absorb. Rents and property values will fall a lot further.
Adelaide is suffering from weak demand and oversupplied office space. Although the worst may be over in terms of demand-side weakness, there is no prospect of sustained growth for a couple of years as the local economy deals with the closure of the GM Holden plant. The patrol boats, frigates and submarines projects will help but not until the end of the decade.
Canberra remains a difficult market. We are coming to the end of the period of substantial oversupply and A grade vacancies have tightened everywhere except at the airport, where there is still plenty of space. However, new construction is about to get under way in Civic, while some secondary properties lie vacant and are difficult to lease.
Retail property markets
Regional and sub-regional centres
Retail property remains a highly popular investment. The volume of transactions reached record levels over the last few years and only a shortage of regional centres for sale has constrained the market. Some existing owners are instead now ploughing additional capital into centre refurbishment/expansion projects.
Retail yields have firmed aggressively over the last few years and are averaging around that of the last market peak. Yet retailing conditions are not nearly so strong. Growth has been slowing in trend terms since early 2014. While larger retailers and chains are outperforming smaller retailers, there have nonetheless been several high profile failures in the last few months. 
The soft economy and weak household income growth will continue to constrain retail expenditure for the rest of this decade. Strong regional differences will emerge as former mining boom areas suffer, while those regions dependent on tourism, education services and other sectors that benefit from a lower Australian dollar enjoy stronger growth.
Shopping centre net operating incomes face further challenges from the poor performance of many anchor tenants and likely pressure on retailer profit margins (and hence their capacity to pay higher rent) from a lower Australian dollar. Changes in tenancy mix, a greater reliance on food and beverage retailers and service sector tenants, and costly upgrades will be required to protect against these threats.
Despite the challenges, centre incomes are, to a great extent, protected by anchor tenant rent and rents from non-expiring specialties on fixed annual escalations. Yields could remain low for some time but they will eventually follow bond rates up.
Large format retail
The large format retail property sector enjoyed another strong year in 2016 across a range of indicators. Strong demand from both consumers and retailers helped to push vacancy rates lower, in turn encouraging rental growth. Meanwhile, the investment market is buoyant.
However, the surge in consumer spending is now past and activity is at more moderate levels. This comes at a time when supply of centres is likely to surge after seven weak years. Reconfiguration of ex-Masters stores into centres could add up to 700,000 square metres of ‘new’ centre floor-space. Moreover, there are also 21 development sites to be accounted for.
Smaller existing centres and strip shopping locations are likely to be the main losers to the ‘new’ ex-Masters centres. Larger, dominant centres are unlikely to suffer as much. Bunnings is a clear winner in the whole process, with a major competitor gone and a great opportunity to pick up new sites easily.
Longer term, the outperformance of larger retailers and chains is expected to continue. Even so, it will be no match for the pace of growth in the 2000s.
On the investment side, demand remains strong. A record dollar value of transactions was achieved in 2015–16. The strength of investor demand has pushed down yields with further yield firming likely over the next 12 to 18 months. Rising bond rates, already putting upwards pressure on yields, will win out after that. Prime values are likely to stagnate rather than fall, but secondary centres could see a drop in prices.
Retail looks reasonably valued, with expected returns around current investment hurdle rates. Even so, retailing and retail property face major challenges. Large format retail has the best estimated return, reflecting its higher yield. Its low rent and expansion opportunities will help it to absorb the Masters properties and secure the longer term strength of the sector, but in the short term there are risks from the amount of reconfigured Masters floor-space likely to come on to the market.
 Industrial property markets
The years of strong investment returns from industrial property are coming to an end, with the period of falling interest rates that had underwritten firming yields and strongly rising asset values now over.
Softer future yields will have a negative impact on valuations and also on construction feasibility, requiring higher pre-lease effective rents to underwrite the financial feasibility of development projects. The transition to higher rents will be relatively smooth, though the risk is that it may take a year or longer. If this occurs, falling vacancies would eventually deliver the necessary step-up in rents.
Industrial property development is running close to demand. Ready availability of land and development competition is keeping a lid on residual land prices, rents and property values, suppressing a cyclical upswing. That makes it less risky but slightly overvalued in relation to market hurdle rates.
Summary
This is an uncertain time for property investors. After a long period of falling interest rates driving firming yields, we are on the threshold of a phase of rising interest rates. The uncertainty is how quickly and by how much interest rates will rise. When they do, yields will soften but that will be offset by the impact of rising rents.
This suggests that yields may have a little further to firm before the impact of rising interest rates comes through.  Meanwhile, continuing soft economic growth means continuing weak demand, in the transition to a post-mining boom economy. The result is marked differences in performance between industries and regions.
Damian Horton is head of property, Cromwell Property Group and can be contacted <a href="https://www.cromwell.com.au/" target="_blank">here</a>.
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jchancellor-FAypfDUnLy

2017 Australian commercial property market outlook: Cromwell's Damian Horton

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GUEST OBSERVER
Our model suggests that private sector wages growth is a little lower than it should be given the degree of labour market slack.
Nonetheless the current level of labour market underutilisation is consistent with wages growth of just above 2 percent.
Our model suggests that a steady decline in the underemployment rate to around 7 percent, would see wages growth return to normal in early 2019.
For Q1 2017, the model points to an outcome of 0.5 percent, which would see the annual rate tick up to 1.9 percent.
Private sector wages growth has been on a downward trend for the past four years. Wages growth was just 1.8 percent over the year to QIV, which was the lowest result in the history of the series. It is lower than would be expected given the level of the unemployment rate and the strong gains in commodity prices over the past year.
There are many explanations for low wages growth, including rising spare capacity in the labour market, heightened job security concerns, low inflation rates and declining commodity prices from the peak in 2011.
<a href="https://www.propertyobserver.com.au/images/2017/03/29/11.jpg" target="_blank">Click to enlarge </a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/03/29/11.jpg" width="600" height="598">
Spare capacity in the jobs market has been rising since early 2011. While the unemployment rate has come down a little over the past year, there has been a steady increase in the underemployment rate. Underemployment measures people that have a job but would like to work more hours. The underemployment rate is now at a record high of 8.7%. Job security concerns also remain elevated. The combination of underemployment and job security concerns means that people are unwilling to push their employers for a pay increase.
<a href="https://www.propertyobserver.com.au/images/2017/03/29/12.jpg" target="_blank">Click to enlarge </a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/03/29/12.jpg" width="600" height="598">
Slowing inflation rates have also contributed to low wages outcomes. While we typically think of low wages contributing to low inflation outcomes the reverse is also true. That is because low inflation outcomes can result in a drop in expectations about future inflation. And inflation expectations impact on actual inflation outcomes. Also, many wages are set with the CPI outcome in mind. Awards and minimum wage outcomes set by the Fair Work Commission are heavily influenced by the CPI. And the RBA has said that two-thirds of the firm’s in their liaison program have indicated that the CPI was a primary determinant in wage-setting.
Wages growth is also correlated with movements in commodity prices. The decline in commodity prices from the peak in 2011 until QII 2016 reduced company profits and constrained wages growth. The sharp lift in commodity prices since mid 2016 would suggest that wages growth should be picking up by now. However previous commodity price booms have typically occurred alongside rising mining investment. And this time mining investment is still falling, not rising.
<a href="https://www.propertyobserver.com.au/images/2017/03/29/13.jpg" target="_blank">Click to enlarge </a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/03/29/13.jpg" width="600" height="598"> 
We estimate a Phillips curve (PC) model to explain wages growth. This relates wages inflation to labour market utilisation. Higher labour market utilisation should lead to higher wage inflation and vice versa. We use the underemployment rate to measure labour market utilisation as the unemployment rate has not fully captured the degree of spare capacity in recent years.
We include the quarterly change in the underemployment rate. And also the inverse of the underemployment rate. This allows the underemployment rate to have a larger effect on wages as it gets lower. We also include the lagged value of wages growth, as wages growth is related to it past values. We also estimate the model including lagged values of the CPI or inflation expectations but find that these variables don’t improve the fit of the model.
The model captures the trends in wages growth well. However it suggests that over the past few years wages growth has been a little lower than would be expected given the amount of spare capacity in the economy. Nonetheless the model points to annual rate of wages growth of just above 2% in the December quarter, which is well below the long run average.
RBA research says that recent low wages growth in Australia appears to be only partly explained by spare capacity in the labour market, the decline in inflation outcomes and the fall in the terms of trade from the 2011 peak. Using micro-level data on wages they also find that since 2012 wage increases have been less frequent than in the past. They have also found that wage growth outcomes have become more similar across jobs. This explains why wages growth is also weak in NSW and VIC, the States where the jobs markets are the strongest (see here for our note on labour market slack by State).
Wages growth in Q1 2017
We already have the underemployment rate for Q1 so we can use our model to forecast wages growth for the March quarter. The model is pointing to a 0.5% rise in private sector wages. This would see the annual rate of growth tick up to 1.9%.
When will wages growth return to normal?
We can also use our model to forecast the future path of wages growth. Our forecasts are for the unemployment and underemployment rates to fall gradually from here. A steady decline in the underemployment rate to around 7% in early 2019 would see wages growth returning to its 10 year average of 3%. It would take a sharp drop in the underemployment rate to around 5%, from its current value of 8.7%, to see wages return to a 3% growth rate this year.
These projections line up with the RBA’s forecasts, which show inflation only slowly returning to target. The Bank’s central forecast is for underlying inflation to remain below the bottom of its 2-3% until 2019. And the RBA is not expecting wages growth to begin to recover until late 2017.
Despite these forecasts, the RBA is unlikely to lower interest rates any further in this cycle. And that is because of financial stability concerns stemming from the rising level of household debt and strongly rising house prices in Sydney and Melbourne. The RBA would prefer to see a slow return of inflation to its target rather than cut rates and see inflation rates increase but household debt rise even further. The RBA have expressed some concern around these issue since late last year. And the rhetoric is getting stronger, with an acknowledgement in the latest Meeting Minutes that “there had been a build-up of risks associated with the housing market.” 
Kristina Clifton is economist, Commonwealth Bank, and can be contacted <a href="https://www.commbank.com.au/">here</a>.
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Where to for wages growth? CBA's Kristina Clifton

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Blaming booming housing market conditions and also concerns that APRA will further tighten lending standards, the Commonwealth Bank and St George have joined NAB and Westpac in another out-of-cycle increase in mortgage rates for investment and owner-occupier loans.
CBA has raised the standard variable rate on interest-only owner-occupier loans by 25 basis points to 5.47 percent, while principal and interest loans will edge up by 3 basis points.
CBA, which has already tightened investor lending requirements, made the most aggressive push on interest-only investor loans, raising them up by 26 basis points to 5.94 percent.
Late on Friday Westpac-owned St George Bank announced it planned to follow suit with the big four banks and raise its rates.
St George said property investors would see their home loan rates rise by 23 basis points while investors with interest-only loans would see their rates increase by nearly one-third of a percentage point.
Rates for owner-occupiers with interest-only mortgages would go up by eight basis points.
ANZ also raised rates on Friday.
"These changes reflect a need to closely manage our regulatory obligations, our portfolio risk and the competitive environment," said ANZ's group executive for Australia, Fred Ohlsson.
The bank's moves follows similar action from both Westpac and NAB after concerns were again raised by the banking regulator APRA about the need to rein in speculative property lending.
NAB raised its standard variable rate by 7 basis points to 5.32 percent, while investor loans jumped 25 basis points to 5.8 percent.
Westpac moved a more modest 3 basis points on its standard variable loan and 23 basis points on investor loans.
"Investors have been slapped with the biggest rate hikes so far amid growing speculation that APRA will further tighten investor lending standards in another attempt to cool down unsustainable housing prices in Sydney and Melbourne," Mozo director Kirsty Lamont said. 
Commonwealth Bank was among the nation’s banks to hit investors with surprise interest rate hikes made independently of any move in the Reserve bank’s official interest rate.
Some analysts argue rate hikes are piling more risk on to a system.
“There is clear evidence that the macro conditions for Australian house prices are deteriorating,” CLSA analyst Brian Johnson told The Australian.
“This change in sentiment is particularly worrisome, given the extent of Australian housing investors who are willing to tolerate a substantial post-tax negative carry on home loans in anticipation of a future gain,” he said.
“The expectation that house prices are no longer rising in itself could trigger correlated selling from this negative cash flow cohort.”
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j.ballantyne1990-6AQqhLzZaK

CBA raise rates for interest-only loans to 5.94 percent

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ANZ bank has updated variable home loan and business loan interest rates with increases in variable interest rates for new investor and owner- occupier home loan customers who choose to repay interest-only from April 22.
The variable interest rate for property investors will increase by 0.25 percent/pa from 5.60 percent/pa to 5.85 percent/pa from 31 March.
Variable interest rates for the 80 percent of owner-occupier borrowers who repay principal and interest on their standard variable home loan remain unchanged at 5.25 percent/pa.-
Investor variable rate home loans (interest only) will increase by a further 0.11 percent/pa from 5.85 percent/pa to 5.96 percent/pa.
For business borrowers, business variable rate indices will increase by 0.08%pa.
ANZ Group Executive Australia Fred Ohlsson said we are pleased to be in a position to keep rates unchanged for the 80% of owner-occupier home borrowers who pay principal and interest on their loan.
“This is a clear signal that we are open for business for Australians either looking to buy a home or looking for a better deal.
“The changes we are making in home lending affect investors and borrowers who only repay interest on their loan. These changes reflect a need to closely manage our regulatory obligations, our portfolio risk and the competitive environment.
"We recognise the day-to-day challenges that home-owners face with their house-hold budgets. We believe this is a balanced decision that reflects the range of regulatory and risk factors, and the pressures on family budgets.
“This is why we are providing our customers with interest-only home loans additional notice and the option to switch to repaying principal and interest to take advantage of the lower rate."
Westpac raised its home loan interest rates soon after NAB announced similar hikes.
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ANZ lifts interest rates for some customers

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GUEST OBSERVER 
The minutes of the March Reserve Bank Board meeting certainly provides interesting reading.
While policymakers are relatively optimistic about the medium term outcomes for the Australian economy, there is clearly a number of ‘hot button’ issues that occupy policymaker thoughts.
To a greater extent it seems that central bank officials are ramping up their discussions and commentary on the housing sector.
In what could be described as the strongest language yet, the minutes discuss the “build-up of risks associated with the housing market”. In particular, the second to last paragraph of the minutes essentially lists a number of these risks, including “briskly” rising home prices; “a considerable” lift in additional supply of apartments scheduled to come on stream over the next few years; slowing growth in rents; rising investor finance; and - probably most concerning - the growth in household debt outstripping incomes. No doubt it is an evolving situation that the Reserve Bank will monitor closely over the coming year. 
<a href="https://www.propertyobserver.com.au/images/2017/03/22/Screen%20Shot%202017-03-22%20at%209.03.05%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/03/22/Screen%20Shot%202017-03-22%20at%209.03.05%20AM.png" alt="">
When it comes to the broader economy, the Reserve Bank believes that economic growth and inflation will lift over 2017, ruling out the need to cut interest rates further. If the forecasts were to change and the Reserve Bank became less positive, rate cuts would clearly be back on the radar screen, but the Bank believes risks are balanced. Rate hikes seem some way off.
The Reserve Bank has highlighted that the issues surrounding the housing sector. And while the latest ABS data on residential property prices also confirms the sizeable lift in home prices, data shows the growth in the number of homes is actually smaller in the past 12 months. Surprisingly the number of homes in Australia grew by 172,800 in the year to December after recording annual gains of 185,800 in the year to September and 182,400 in the year to June. It was the smallest annual lift in homes for 15 months.
Consumer confidence eased over the past week with consumers more negative on the outlook for the economy. In fact the reading on economic outlook over the next five years, hit a one-year low. Interestingly the readings on family finances has also weakened in the last few weeks. And while consumers are far from glum, there is no doubt the discussions on potential risks to the housing sector are adding a degree of caution.
Inflation expectations of consumers fell last week to the lowest reading since the start of the year although it still remains above 4 per cent.
<a href="https://www.propertyobserver.com.au/images/2017/03/22/Screen%20Shot%202017-03-22%20at%209.04.45%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/03/22/Screen%20Shot%202017-03-22%20at%209.04.45%20AM.png" alt=""> 
What do the figures show?
Reserve Bank Board minutes:
Last two paragraphs: “Given all of these considerations, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
“Recent data continued to suggest that there had been a build-up of risks associated with the housing market. In some markets, conditions had been strong and prices were rising briskly, although in other markets prices were declining. In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years. Growth in rents had been the slowest for two decades. Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income. Supervisory measures had contributed to some strengthening of lending standards.”
“Momentum in the labour market remained difficult to assess, but it was clear that spare capacity remained and there continued to be significant differences in labour market outcomes across the country. Domestic wage pressures remained subdued and household income growth had been low, which, if it were to persist, would have implications for consumption growth and the risks posed by the level of household debt.”
“GDP growth had picked up in the December quarter to be around 21⁄2 per cent over 2016, which was only a little below estimates of the medium-term potential growth rate of the economy. This outcome confirmed that the weakness in the September quarter was temporary. Looking forward, year-ended growth was expected to pick up gradually to be above its potential rate over the forecast period. An appreciating exchange rate would complicate the adjustment of the economy following the end of the mining investment boom.”
<a href="https://www.propertyobserver.com.au/images/2017/03/22/Screen%20Shot%202017-03-22%20at%209.05.45%20AM.png" target="_blank">Click to enlarge</a>
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“Domestically, there had been a significant increase in the terms of trade in the second half of 2016 and many commodity prices had risen further in recent months. Although mining companies were expected to increase their dividend payouts following the sharp rise in mining sector profits in the December quarter, a significant proportion of shareholders are non-residents, which would limit the flow-through to an increase in household incomes in Australia.” 
Consumer confidence
The ANZ/Roy Morgan consumer confidence rating fell by 1 per cent to 112 in the week to March 19. Confidence is down 3.4 per cent over the year and below the average of 113.2 since 2014. Two of the five components of the index fell in the latest week:
The estimate of family finances compared with a year ago was up from +5 to +6;
The estimate of family finances over the next year was steady at +21;
Economic conditions over the next 12 months was down from zero to -3;
Economic conditions over the next 5 years was down from +7 to +3;
The measure of whether it was a good time to buy a major household item was up from +32 to +33;
In addition the inflation expectation 2 years ahead, fell from 4.7 per cent to 4.1 per cent. Inflation expectations have now held above 4 per cent for the past 14 weeks.
Residential property prices
The Bureau of Statistics (ABS) has released its Residential Property Price indexes.
“The price index for residential properties for the weighted average of the eight capital cities rose 4.1 per cent in the December quarter 2016. The index rose 7.7 per cent through the year to the December quarter 2016.
The capital city residential property price indexes rose in Melbourne (+5.3 per cent), Sydney (+5.2 per cent), Brisbane (+2.2 per cent), Adelaide (+1.8 per cent), Canberra (+2.8 per cent), Hobart (+4.5 per cent) and Perth (0.3 per cent), and fell in Darwin (-1.5 per cent).
Annually, residential property prices rose in Melbourne (+10.8 per cent), Sydney (+10.3 per cent), Brisbane (+3.8 per cent), Adelaide (+4.1 per cent), Canberra (+5.5 per cent) and Hobart (+8.8 per cent), and fell in Perth (-4.1 per cent) and Darwin (-7.0 per cent).”
The ABS notes that as at December 2016 there were 9.802 million homes in Australia.
“The total value of residential dwellings in Australia was $6,438,537.3m at the end of the December quarter 2016, rising $274,160.0m over the quarter.
The mean price of residential dwellings rose $25,400 to $656,800 and the number of residential dwellings rose by 39,600 to 9,802,700 in the December quarter 2016.”
CommSec estimate that there were 2.476 people per home in December quarter 2016, down 0.4 per cent on a year ago. The number of people per home have been falling in annual terms for 2 1⁄2 years.
Surprisingly the number of homes in Australia grew by 172,800 in the year to December after recording annual gains of 185,800 in September and 182,400 in June. It was the smallest annual lift in homes for 15 months.
CommSec estimates that wealth accumulated in housing assets rose by $10,547 per person in the December quarter to $265,276. 
The number of transfers (settlements) of houses and attached dwellings in Sydney in the December quarter was the lowest for any December quarter for the past 11 years.
What is the importance of the economic data?
The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
The Australian Bureau of Statistics (ABS) provides quarterly data on residential prices. The figures provide further perspectives on the state of the housing purchase sector.
The Reserve Bank releases minutes of its monthly Board meeting a fortnight after the event. The minutes give a guide to Reserve Bank thinking on interest rate settings.
What are the implications for interest rates and investors?
CommSec expects the Reserve Bank to remain on the interest rate sidelines for an extended period.
When it comes to ‘hot button’ issues it’s clear that policymaker concerns are clearly centred on the housing sector. Healthy home prices have been a key driver of rising wealth levels, supporting spending. But the Reserve Bank is worried about the lift in debt levels to buy homes.
If the recent drop in consumer confidence is sustained it could lead to less household activity – a detriment to retailers. 
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Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/">CommSec</a>
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Reserve Bank raises concerns on housing: Savanth Sebastian

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GUEST OBSERVER
The minutes of the Reserve Bank Board’s March monetary policy meeting conveyed a more downbeat tone than the Governor’s decision statement, the commentary sounding a little more concerned about labour market conditions, household incomes and risks in the housing market.
Recall that the Governor’s decision statement included a mix of positive and negative changes vs February – business and consumer confidence at or above average and the global backdrop more constructive but the picture around household incomes and labour markets less encouraging. Changes to the commentary on housing were limited to a note that “supervisory measures have contributed to some strengthening of lending standards.”
The fuller discussion in the minutes presents a little differently. 
The Bank’s central case is still constructive: “Looking forward, year-ended growth … expected to pick up gradually to be above its potential rate over the forecast period” with spare capacity expected to decline slowly and underlying inflation to gradually rise.
The global backdrop is also noted as a clear upside with a marginally more constructive view on commodity prices (“the recent improvement in global demand suggested that higher commodity prices could be more persistent than previously anticipated”).
However, links back to domestic demand are again questioned with the boost to mining sector profits seen flowing more to dividends than spending with significant ‘leakage’ to non-resident shareholders. Interestingly, comments in the detail also note that “the terms of trade had played an important role in households’ saving and spending decisions” in recent decade, perhaps suggesting that the Bank suspects any ‘windfall’ gains for consumers may tend to be saved rather than spent.
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.  
Business and consumer confidence rates less of a mention, with just a watered down comment “household perceptions of their personal finances had also been around average”. The Westpac-Melbourne Institute Consumer survey has shown a material weakening in this component in recent months.
The minutes seem much less certain about labour markets. For example, whereas the Governor’s decision statement noted “forward–looking indicators point to continued expansion in employment over the year ahead” the minutes are more tentative saying they “suggested that there could be some pick-up in employment growth near term“ also suggesting that the labour market “may not be quite as strong as the headline employment and unemployment rate figures indicated”.
The minutes strike a different tone on housing as well, referring to “a build-up of risks associated with the housing market”. That language seems a little more urgent. Also notable is the link drawn between incomes and housing risks:”… household income growth had been low, which, if it were to persist, would have implications for consumption growth and the risks posed by the level of household debt.”
Members also noted that “although credit growth was lower than in previous decades, it had been faster than the subdued growth in household incomes”.
This is important from the point of view of potential changes to macro-prudential policy. Recall that the main ‘macro’ measure introduced in the 2014-15 changes was a 10 percent guide for annual growth in investor credit. In considering the risks around household debt levels, the RBA is really thinking in terms of leverage, i.e. the ‘debt to income ratio’.
Under this framework, if incomes are now seen as growing at a permanently slower pace then the trajectory for credit growth would need to be lowered. The RBA’s next Financial Stability Review, due April 13 may provide more elaboration on these comments. 
Conclusion
While still presenting a constructive growth view on global and local growth prospects, the minutes to the March RBA meeting place more emphasis on weaknesses around labour markets and the consumer and downplay the potential upside from rising commodity prices. They also sound a touch more urgent around risks in the housing market. 
That mix points to an RBA that is slightly more dovish stance on rates but potentially mulling ‘macro-prudential’ policy changes to manage risks. 
Matthew Hassan is senior economist with <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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Matthew_Hassan-HHWHptmrw4

RBA shows a little more concern around housing risks: Matthew Hassan

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GUEST OBSERVER 
Today’s Minutes are yet further evidence that the RBA is firmly on hold. The Board have retained a relatively optimistic view of the global and domestic economies.
And concerns around household debt and dwelling prices were once again aired.
This time, however, the Board was more explicit on housing-related risks by noting that, “recent data continued to suggest that there had been a build-up of risks associated with the housing market.” 
On the international economy, the Board sounds relatively upbeat on recent developments. In particular, it was noted that, “a number of indicators, including growth in global industrial production, global trade volumes and business sentiment, had improved.” And more importantly for monetary policy, “recent data had also confirmed the pick-up in global inflation.”
<a href="https://www.propertyobserver.com.au/images/2017/03/21/Screen%20Shot%202017-03-21%20at%201.02.35%20PM.png" target="_blank">Click to enlarge</a>
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The solid 1.1 percent lift in real GDP in the December quarter backed up the Board’s view that the weakness in the September quarter was temporary. Indeed, the 
Minutes note that growth over QIV had been, “above expectations”. The RBA continue to expect growth to pick up above its potential rate over the forecast period. This is clearly a best case scenario with the risk that growth outcomes undershoot the Bank’s expectation. 
The Board continues to lack conviction in its assessment on the labour market, noting that it, “remained difficult to assess”. The RBA expects spare capacity to “decline slowly.” Here we note that the Minutes predate the February employment report (published last week) which showed employment contracted over the month and the unemployment rate lifted to 5.9 percent. Another weak employment report would see the RBA’s forecasts for employment and wages growth tested.
<a href="https://www.propertyobserver.com.au/images/2017/03/21/Screen%20Shot%202017-03-21%20at%201.04.40%20PM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/03/21/Screen%20Shot%202017-03-21%20at%201.04.40%20PM.png" alt="">
On housing, the Board has upped its rhetoric around the build-up of risks. The Minutes note that, “borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income”. These comments coupled with the RBA’s acknowledgment that, “there had been a build-up of risks associated with the housing market” could be interpreted as the Bank calling on APRA to further place restrictions on lending to investors. In other words, watch this space. 
On the AUD, the Board notes that, “an appreciating exchange rate would complicate the adjustment of the economy”. We suspect that the RBA would have been expecting a March Fed rate hike to take some pressure off the AUD. 
But the currency has strengthened since the Fed tightened policy and is edging further away from where we think the RBA views the sweet spot (low USD0.70s).
The RBA’s well telegraphed reluctance to take the cash rate any lower has put more upward pressure on the AUD than would otherwise have been the case.
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<img src="https://www.urban.com.au/images/2017/03/21/Screen%20Shot%202017-03-21%20at%201.05.39%20PM.png" alt="">
The Outlook
We see little chance of further policy easing despite core inflation running below target and the unemployment rate being above the level associated with full employment. The consistent message from the RBA over the last six weeks has been that rate cuts are off the table.
When Governor Lowe appeared before the House of Representatives Standing Committee on Economics in late February he stated that, “the market pricing is for interest rates to be constant right through this year. That seems a reasonable proposition to me.” He further added that, “the main effect (of another rate cut) would be more borrowing for housing, pushing up housing prices.” This is clearly undesirable.
In our view, it would take a sustained loss of momentum in job creation or a fall in dwelling prices for Lowe to entertain the idea of taking the policy rate lower. Neither outcome is in our central scenario and as such, we see the RBA on hold over 2017 and well into 2018. 
 
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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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RBA Board minutes confirm policy is on hold over near term: Gareth Aird

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Minutes of the March Monetary Policy Meeting of the Reserve Bank Board
Members Present
Philip Lowe (Governor and Chair), Guy Debelle (Deputy Governor), John Akehurst, Kathryn Fagg, John Fraser (Secretary to the Treasury), Ian Harper, Allan Moss AO, Carol Schwartz AM, Catherine Tanna
Others Present
Luci Ellis (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial Markets), Alexandra Heath (Head, Economic Analysis Department)
Anthony Dickman (Secretary), Andrea Brischetto (Deputy Secretary)
International Economic Conditions
Members commenced their discussion of international developments by noting that forecasts by private sector analysts for growth in the major economies in 2017 had been revised upwards since mid 2016. Growth in global industrial production and merchandise trade had picked up further and survey measures of business conditions had remained at high levels. Headline inflation in the major advanced economies had increased noticeably in recent months, largely as a result of higher oil prices, to be close to most central banks' targets. However, core inflation had generally remained low.
The Chinese National People's Congress had announced a growth target for the Chinese economy in 2017 of around 6.5 per cent (or higher, if possible), which is only slightly lower than the pace of growth recorded for 2016. This suggested that the authorities would continue to use policy to support near-term growth. However, policymakers had also increased their focus on addressing the risks to longer-term growth. The People's Bank of China had signalled a reduction in monetary stimulus, reflecting concerns about rising financial stability risks, and the target for growth in total social financing had been lowered slightly to 12 per cent. Additional measures had also been put in place to curb rapid housing price growth in some cities. Members noted that there had been a pick-up in the growth of non-bank and off-balance sheet lending.
In the United States, consumption had been the key driver of expenditure growth over 2016, supported by continuing improvements in labour market conditions. Investment intentions had picked up significantly and the number of active oil rigs had increased in response to the higher level of oil prices. Fiscal policy was also expected to be expansionary under the new administration and the US economy was expected to grow above its potential rate in 2017. Members noted that the volume of trade destined for the United States had fallen significantly as a share of total global trade since the late 1990s. Nevertheless, a move to more protectionist policies would still be damaging for the medium-term outlook for both the US and global economies. Above-average growth in unit labour costs, higher oil prices and more expansionary fiscal policy were all expected to contribute to a further rise in core inflation, which had increased since 2015 to be only a little below the Federal Reserve's goal.
The euro area and Japanese economies had grown faster than their potential growth rates over 2016, resulting in further improvements in labour market conditions. The unemployment rate in the euro area had fallen to its lowest level in seven years, while the unemployment rate in Japan had declined to a two-decade low. In both economies, core inflation had remained low, while headline inflation had increased, largely as a result of higher oil prices. In the euro area, headline inflation had increased to be consistent with the European Central Bank's target. Measures of inflation expectations in both economies had been steady or had increased.
Members observed that merchandise exports had picked up for the euro area and Japan towards the end of 2016. A significant increase in merchandise exports had also contributed to growth in East Asia. Members noted that the increase in global trade over the second half of 2016 had been underpinned by an improvement in global economic conditions, both for Australia's major trading partners and other parts of the world that were important sources of external demand for output from East Asia.
Australia's terms of trade had risen by around 15 per cent over the second half of 2016 and were expected to rise again in the March quarter. In February, prices for iron ore, base metals and crude oil had all reached their highest level in more than a year, although the price of coking coal had fallen from its peak in November. Some reversal in the terms of trade was still expected, although the recent improvement in global demand suggested that higher commodity prices could be more persistent than previously anticipated. Members noted that generalised strength in commodity prices tended to indicate an improvement in global demand conditions, but that factors affecting the supply of commodities had also affected prices.
Domestic Economic Conditions
GDP growth in the December quarter of 1.1 per cent had been above expectations. The outcome partly reflected the reversal of some of the temporary factors that had contributed to the fall in output in the September quarter. Most notably, there had been a solid pick-up in export growth in the December quarter; in addition, growth in both consumption and business investment had been higher than expected. Total nominal income had risen strongly, driven by growth in mining sector profits as a result of the higher terms of trade; in contrast, growth in labour incomes had been unusually weak.
The mining sector had contributed to growth in the December quarter, reflecting higher exports and an unexpected increase in investment. Members observed that some resource firms may have been able to increase their exports to take advantage of higher commodity prices by running down inventories. Consistent with previous staff forecasts, the capital expenditure survey of investment intentions continued to indicate that mining investment would fall further over the following year or so, but that the drag on growth would dissipate over this period.
Non-mining business investment had risen in the December quarter, largely as a result of higher non-residential construction, although machinery and equipment investment had also risen. Non-mining business investment had picked up over the previous two years or so and business conditions had been more positive in recent months. In contrast to these more positive signs, non-residential building approvals had declined further and the capital expenditure survey continued to suggest that, in aggregate, firms do not intend to increase their spending on non-mining investment over the following year or so. Members observed, however, that this survey does not cover some important sectors, including education and health, and also does not include investment in intellectual property, which has become an increasingly important share of non-mining business investment in the national accounts measure. Members noted that in most sectors there had been little evidence that non-mining business investment had been held back by lack of access to credit.
Dwelling investment had rebounded in the December quarter; much of the strength had been concentrated in New South Wales. Even though building approvals had fallen significantly in recent months, the substantial amount of building work in the pipeline suggested that dwelling investment would continue to contribute to growth in coming quarters. Conditions in established housing markets had continued to differ significantly across the country. Over recent months, conditions appeared to have strengthened in Sydney and had remained strong in Melbourne; these cities had continued to record brisk growth in housing prices, and auction clearance rates had remained high. Housing loan approvals and credit growth had picked up for investors, primarily in New South Wales and Victoria. In contrast, housing prices and rents had fallen in Perth for two years or so, and apartment prices had declined in Brisbane.
Rural exports had grown strongly in the December quarter, reflecting strong farm production following favourable weather conditions in many areas over the second half of 2016. As a result of this and the higher prices for bulk commodity exports, there had been a trade surplus in the December quarter for the first time in almost three years. The current account deficit had narrowed to less than 1 per cent of GDP, the smallest deficit since 1980; the trade surplus was partly offset by a widening in the net income deficit as some of the increase in mining profits had accrued to foreign owners.
Household consumption growth, which had been relatively subdued in mid 2016, picked up in the December quarter, consistent with retail sales. Liaison with retailers suggested that recent trading conditions had been around average and household perceptions of their personal finances had also been around average.
The pick-up in consumption growth stood in contrast to the ongoing weakness in labour incomes, with the household saving ratio declining in the December quarter. Members noted that over the past two decades movements in the Australian household saving ratio had been much larger than those in other similar economies. One contributing factor was likely to have been that Australia had experienced a much larger terms of trade cycle than other developed economies with significant commodity exports. Differences in the evolution of household saving ratios across the states suggested that the terms of trade had played an important role in households' saving and spending decisions.
Indicators of labour market conditions had remained mixed. Employment growth had picked up in recent months and the unemployment rate had edged down to 5.7 per cent in January. Leading indicators, including job advertisements and firms' employment intentions, suggested that there could be some pick-up in employment growth in the near term. Members noted that although experience had varied across the states, in recent years employment growth had generally been stronger in the capital cities than in regional areas. Employment growth had continued to be concentrated in part-time jobs over the past year and wage growth had remained low, suggesting that the labour market had not been quite as strong as the headline employment and unemployment rate figures had indicated.
The wage price index had increased by 1.9 per cent over 2016, in line with the staff forecasts. Subdued wage growth appeared to have been broad based and was most pronounced in mining-related industries and states. Average earnings per hour in the national accounts had fallen sharply in the December quarter, as had the wage bill as a share of nominal GDP. Although quarterly movements in average earnings per hour are volatile, this measure of wage growth had also been subdued in year-ended terms, continuing to suggest there was very little labour cost pressure in the economy. Members noted that the recent experience of low inflation may also have contributed to lower wage outcomes and that other business costs, such as rents, are often linked to inflation. Members observed that although credit growth was lower than in previous decades, it had been faster than the subdued growth in household incomes.
Financial Markets
Members commenced their discussion by noting that global financial markets had been relatively quiet over the preceding month, with market participants focused on evolving expectations about the upcoming US Federal Reserve meeting, the new US administration's policies and national elections in Europe in coming months. Globally, monetary policy remained very stimulatory and financing remained readily available on favourable terms.
Financial market participants' expectations for an increase in the federal funds rate at the March meeting of the US Federal Open Market Committee (FOMC) had risen to over 90 per cent. This followed continued positive economic news in the United States as well as statements by FOMC members. Members noted the widely held expectations for no change in monetary policy settings in the euro area and Japan, compared with the general view earlier in the previous year that further monetary easing was in prospect in these economies.
In major markets, 10-year government bond yields remained above their lows of mid 2016, reflecting the run of more positive economic news since then, as well as expectations that the new US administration's policies would support US growth. Members observed that, although euro area government bond spreads to German government bonds had increased over recent months in response to political developments, yields remained relatively low by historical standards. Corporate bond yields in developed markets remained very low, with spreads to government bonds having narrowed markedly over the previous year, particularly for non-investment grade bonds. Australian government bond yields had been little changed over the month and the spread to US Treasury yields had also been steady at a low level. As in other markets, Australian corporate bond spreads had narrowed over the preceding year.
Global equity prices had moved higher over the prior month in response to continued positive economic data. In the United States, financial sector share prices had increased strongly following the new administration's orders for a review of financial market regulations. In the euro area, banks' share prices had declined following lower-than-expected earnings, which were largely related to loan-loss provisions. Over the previous year or so, Australian share prices had moved broadly in line with those in the rest of the world excluding the United States, where share prices had risen further. Recent Australian company earnings results had been generally positive, driven by strong profits in the resources sector.
The US dollar had been little changed over the prior month in nominal trade-weighted terms, while the euro had depreciated a little against the US dollar, in part reflecting political uncertainty around the upcoming national elections. The Chinese renminbi had been broadly unchanged over the preceding month against the US dollar and in trade-weighted terms.
Members noted that the People's Bank of China had tightened monetary policy a little and indicated that further tightening was likely in response to rising inflationary pressures and to address leverage, including of financial institutions. The tightening had flowed through to increased corporate bond spreads; recent bond issuance in China had been weak after a sustained period of strength, although yields had remained low. In emerging markets more broadly, financial market conditions had been favourable and flows into emerging market funds had resumed as the global economic outlook had improved since mid 2016.
The Australian dollar had been little changed over the prior month and had remained more than 10 per cent higher against the US dollar and in trade-weighted terms since early 2016, reflecting the significant increase in commodity prices since then.
Members observed that Australian banks' funding costs and average outstanding housing and business lending rates were estimated to have been broadly steady over recent months. Interest rates had increased slightly over prior months for some investor and interest-only housing loans.
Financial market pricing indicated that market participants expected the cash rate to remain unchanged at the March meeting.
Considerations for Monetary Policy
In considering the stance of monetary policy, members noted that recent data had continued to support a more positive outlook for growth of Australia's major trading partners than had been apparent a few quarters earlier. A number of indicators, including growth in global industrial production, global trade volumes and business sentiment, had improved. Recent data had also confirmed the pick-up in global inflation. Financial market data suggested that the probability of the Federal Reserve increasing the federal funds rate at the March meeting had increased markedly and there was no longer an expectation of further monetary easing in other major economies. At the same time, however, there continued to be significant uncertainty about policy in China and the United States and the implications for global growth and trade after 2017.
Domestically, there had been a significant increase in the terms of trade in the second half of 2016 and many commodity prices had risen further in recent months. Although mining companies were expected to increase their dividend payouts following the sharp rise in mining sector profits in the December quarter, a significant proportion of shareholders are non-residents, which would limit the flow-through to an increase in household incomes in Australia. However, the fact that the recent increases in commodity prices had been supported by a pick-up in global demand raised the possibility that commodity prices could be higher than expected, in which case the flow-through to the domestic economy could be larger than currently forecast.
The Australian economy had continued to make its transition following the end of the mining investment boom, supported by the low level of interest rates and the depreciation of the exchange rate since 2013. GDP growth had picked up in the December quarter to be around 2½ per cent over 2016, which was only a little below estimates of the medium-term potential growth rate of the economy. This outcome confirmed that the weakness in the September quarter was temporary. Looking forward, year-ended growth was expected to pick up gradually to be above its potential rate over the forecast period. An appreciating exchange rate would complicate the adjustment of the economy following the end of the mining investment boom.
Momentum in the labour market remained difficult to assess, but it was clear that spare capacity remained and there continued to be significant differences in labour market outcomes across the country. Domestic wage pressures remained subdued and household income growth had been low, which, if it were to persist, would have implications for consumption growth and the risks posed by the level of household debt. Spare capacity was expected to decline slowly as momentum in the economy built; wage growth and underlying inflation were expected to rise, but only gradually.
Recent data continued to suggest that there had been a build-up of risks associated with the housing market. In some markets, conditions had been strong and prices were rising briskly, although in other markets prices were declining. In the eastern capital cities, a considerable additional supply of apartments was scheduled to come on stream over the next few years. Growth in rents had been the slowest for two decades. Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income. Supervisory measures had contributed to some strengthening of lending standards.
Given all of these considerations, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.
The Decision
The Board decided to leave the cash rate unchanged at 1.5 percent.
For more information, go to the Reserve Bank website <a href="https://www.rba.gov.au" target="_blank">here</a>.
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Minutes of March 2017 Monetary Policy meeting of the Reserve Bank Board

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Westpac has raised its home loan interest rates, soon after NAB announced similar hikes, with both banks citing increasing funding costs.
But the banks are also reacting to heightened regulatory concerns as to the pace of lending.
Today ASIC chairman Greg Medcraft said he had "been saying for a while that I thought it was a bubble and other people are catching up now." 
<div>
"Its Sydney and Melbourne [where prices are rising] so I think macroprudential are useful tools."
He said there were two aspects to macroprudential policies - the "prudential" aspect which impacts capital and the "conduct" aspect which regulated responsible lending.
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<div>Medcraft said ASIC had played an active role with regard to conduct citing ASIC's report on mortgage broking and on interest only loans. </div>
The country’s second-largest bank said variable home loan rate for owner occupiers will increase by 0.03 percent to 5.32 percent per annum for customers with principal and interest repayments.
For owner occupiers on a variable home loan rate and interest-only repayments, there is a 0.08 percent increase to 5.49 percent per annum. The new rates come into effect on March 24.
For investors, the increases are higher with variable loan rate rising by 0.23 percent to 5.79 percent per annum for principal and interest repayments, while for interest only repayments, the increase is 0.28 percent to 5.96 percent per annum. 
The rate hike was because of a economic and regulatory factors, said George Frazis, chief executive of Westpac Consumer Bank.
“Today’s changes are in response to increasing funding costs. Despite home loan interest rates being at historically low levels, both deposits and wholesale funding of mortgages have increased over the last nine months,” he said.
 “We understand the significance of interest rate changes to our home loan customers, so we take a very careful approach to these decisions.”   
Customers with interest only home loans who wish to move to principal and interest repayments can do so without paying a switching fee until 17 June 17, 2017.
Variable lending products for small businesses will also increase by 0.08 percent from April 3, the bank said.
Late last week, National Australia Bank lifted home loan rates by as much as a quarter of a percentage point, citing rising funding costs and increased regulation.
NAB raised its rates for owner-occupiers from 5.25 percent to 5.32 percent while for investors, it is now 5.8 percent from 5.55 percent previously. 
   
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Westpac follows NAB in raising home loan interest rates

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GUEST OBSERVER
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<div>The Commonwealth Bank Business Sales Indicator (BSI) – a measure of economy-wide spending – rose by just 0.1 percent in trend terms in February, the slowest growth in two years.</div>
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 Spending had lifted at an unsustainable pace of 0.7-0.8 percent between September to November last year before slowing over the past three months.</div>
<div>
 Annual trend growth in sales stood at 5.0 per cent, down from 5.3 percent in January and the slowest growth pace in five months.</div>
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 The more volatile seasonally adjusted BSI rose by 0.6 percent in February after falling by 0.4 percent in December and January. Annual growth stands at 4.5 percent.</div>
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 At a sectoral level, 11 of the 19 industry sectors expanded in trend terms in February, down from 14 sectors in both December and January. And sales rose in five of the eight states and territories in February.
The Commonwealth Bank BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities. The BSI covers spending broadly across the economy rather than just retail sales, including spending on automobiles, personal services and airlines.
What does it all mean?
Spending growth looks weak, but that represents some statistical payback from above-average growth late last year. Annual growth near 5 per cent is still healthy.
Still, it does appear that consumers are cautious, reflected in recent confidence or sentiment surveys. But spending growth is solid in Tasmania due to strong tourism flows. And that strength is also represented in spending at hotels and motels across the country.
What does the data show?
Economy-wide spending slowed further in February. The Commonwealth Bank Business Sales Indicator (BSI) – a measure of economy-wide spending – rose by 0.1 percent in trend terms in February after lifting 0.3 percent in January and expanding 0.5 percent in December.
Over 2016, sales lifted at a soft 0.2 per cent month pace from March to June before picking up to a monthly 0.7-0.8 per cent growth pace between September and November. Spending growth has averaged 0.4 per cent a month over the past year.
Annual trend sales growth slowed from 5.3 per cent to a 5- month low of 5.0 per cent in February.</div>
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<div class="column">The more volatile seasonally-adjusted BSI rose by 0.6 percent in February after falling by 0.4 per cent in December and January. Annual growth stands at 4.5 per cent.
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<div>The Commonwealth Bank BSI is obtained by tracking the value of credit and debit card transactions processed through Commonwealth Bank merchant facilities. And in line with the practice of the Bureau of Statistics with retail trade data, seasonally adjusted and trend estimates of the BSI are obtained by applying statistical software. The seasonally adjusted and trend BSI results permit analysis of the broader underlying trends that may be hidden in the raw data.</div>
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 Across sectors, 11 of the 19 industry sectors rose in trend terms in February. The biggest drop in sales occurred at Mail Order/Telephone Order Providers (down 0.9 percent) from Business Services (down 0.6 percent) and Retail Stores (down 0.5 percent).</div>
<div>
 On the other side of the equation, the strongest gains in sales occurred in Service Providers (up 1.4 percent) from Automobiles &amp; Vehicles (up 1.1 percent).</div>
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<div>Other notable trend increases in sales occurred in Hotels &amp; Motels (up 0.9 percent) and Professional Services &amp; Membership Organisations (up 0.6 percent).</div>
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<div>In annual terms in February, only three of the 19 industry sectors contracted: Mail Order/Telephone Order Providers, Transportation and Retail Stores.</div>
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<div>At the other end of the scale, sectors with strongest annual growth in February included: Hotels &amp; Motels (up 15.1 percent), Service Providers (up 13.0 percent) and Automobiles &amp; Vehicles (up 12.8 percent).</div>
<div>
 Across states and territories in February, sales were stronger in five states and territories. Strongest were Tasmania (up 1.1 percent), followed by Victoria (up 0.5 percent), South Australia (up 0.4 per cent), Western Australia and Northern Territory (up 0.1 percent).</div>
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<div>Spending was flat in Queensland and sales fell 0.3 percent in NSW and fell 0.2 percent in the ACT.</div>
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 Spending has consistently increased in Western Australia for 69 months, for 67 months in South Australia and for 61 months in Tasmania. In annual terms all states and territories had sales above a year ago. Strongest growth was South Australia (up 9.0 per cent) from ACT (up 7.3 per cent), Tasmania (up 7.0 per cent), Western Australia (up 6.1 per cent), Queensland (up 5.8 per cent), NSW (up 4.5 per cent), Victoria (up 3.7 per cent) and Northern Territory (up 0.7 per cent).
 
 
What is the importance of the report?</div>
<div> </div>
<div>The Commonwealth Bank releases its Business Sales Index around the 20th each month. The data provides a broader perspective of consumer spending. The Business Sales Indicator includes transactions made at traditional retail establishments such as supermarkets, clothing stores and cafes &amp; restaurants and as such is more comparable to the ABS Household Final Consumption Expenditure released on a quarterly basis.</div>
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<div>The Business Sales Indicator also covers businesses such as airlines, car dealers and utilities such as water and electricity companies as well as motels, business, professional and government services and wholesalers.
 
What are the implications for interest rates and investors?
CommSec expects no change in official interest rates for the foreseeable future.</div>
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 The outlook for spending remains favourable with interest rates low, rising home prices boosting wealth, wage 
growth still exceeding that of prices and job ads near 5-year highs. </div>
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<div><a href="https://www.propertyobserver.com.au/images/2017/03/19/Screen%20Shot%202017-03-20%20at%208.10.52%20AM.png" target="_blank">Click to enlarge</a></div>
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<div><img src="https://www.urban.com.au/images/2017/03/19/Screen%20Shot%202017-03-20%20at%208.10.52%20AM.png" alt=""></div>
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Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx">CommSec</a>. 
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