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
The unexpected outcome of the Brexit vote injected a good dose of uncertainty and volatility into financial markets, especially in Europe and the UK.
A flight to safety saw the US dollar appreciate relative to other currencies and, while currencies and stock markets have settled down, the Brexit vote will likely echo for a long time to come, durably changing the European political landscape.
Domestically, the federal election has turned out much closer than many expected and it could be some time before the result is finalised. Without new economic data to go by, it is the political uncertainty that dominates the outlook.
Relative to last month, the CAMA RBA Shadow Board’s policy preferences have become noticeably more dovish, reversing the more contractionary stance from the previous month. The Shadow Board attaches a 63 percent probability to a rate hold being the appropriate policy setting. The confidence attached to a required rate cut equals 18 percent, while the confidence in a required rate hike equals 19 percent.
Australia’s unemployment rate and participation rate remain unchanged at 5.7 percent and 64.8 percent. No new data on wage growth has been released since last month.
The turmoil in the financial markets following Brexit has left the Aussie dollar stronger relative to the US dollar; it is trading around 75 US¢. Yields on Australian 10-year government bonds have continued to fall to historic lows, below 2 percent.
Domestic share prices, though slightly more volatile, are largely moving sideways, with the S&amp;P/ASX200 last week closing just under 5300, not far below the recent high of 5430. Global stocks, particularly in European and British markets have lost between 5 percent and 10 percent of their value, following the Brexit vote.
In the wake of the Brexit vote, the global economic outlook is currently dominated by politics, with elections looming in a number of countries and uncertainty in Europe and elsewhere working its way through the global economy. The direct effect of the Brexit outcome on the Australian economy should be minimal but through global capital markets and international trade this far-away event may eventually be felt after all.
Consumer and producer confidence have barely shifted since last month. Capacity utilisation has risen to above 82 percent, while construction output has declined slightly. Retail sales have been growing by a little over 3 percent year-on-year.
The Shadow Board’s confidence measures have reversed somewhat since last month. It attaches a 63 percent probability (52 percent last month) that “no change” is the appropriate policy, an 18 percent probability (11 percent last month) that a rate cut is appropriate and a 19 percent probability (37 percent in the previous month) that a rate rise, to 2.00 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 1.75 percent equals 23 percent (24 percent in June). The estimated need for an interest rate decrease has risen from 16 percent to 29 percent, while the need for a rate increase has fallen 12 percentage points to 48 percent.
A year out, the Shadow Board members’ confidence that the cash rate should be held steady equals 18 percent (14 percent in June), while the confidence in a required cash rate decrease equals 26 percent (16 percent in May) and in a required cash rate increase 56 percent (70 percent in June).
 
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jchancellor-FAypfDUnLy

Rates should stay on hold under election, Brexit uncertainty: RBA Shadow Board

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<img src="/images/2016/06/22/Holdencapital_banner.jpg" alt="" width="504" height="106">
SPONSORED POST
The current Australian residential property market over recent years has gone from strength to strength.
With interest rates at one of the lowest points in Australia’s history, our current low currency rate attracting overseas investment into Australian property and limited supply levels in many capitals post the GFC, this has lead to a property market ranging from solid in some locations such as Brisbane to booming in areas such as Sydney and parts of Melbourne. 
An indication as to where our construction industry is at can be gained from the number of cranes on our city skylines, currently there are over 647 across Australia’s cities of which 79 percent are residential, 9 percent commercial and 12 percent covering the rest of the sectors.
Accordingly, with the major banks in Australia under strong regulatory pressure as we have previously highlighted, we have now reached a position where they have practically stopped lending on major projects for all but the very best of their institutional and high net worth corporate clients. Most developers are struggling to understand why all of a sudden they are faced with a problem that they can no longer get bank finance on the terms traditionally available.
The reality is that the major banks risk departments are now calling the shots, even though their front office credit department may have approved the project. With thousands of properties currently under construction throughout Australia, particularly in terms of apartments in concentrated locations within the major capitals there is a growing concern within these risk departments as to the level of potential settlement risk.
This in turn is borne out of their concern that many investors will not achieve finance approval for their investment if the oversupply results in their purchase price being “out of the money” as a result of falling values and some cases a two tiered market emanating from these oversupplies.
That said, there are opportunities for developers who have their finger on the pulse of the current changes in market demand for product types and mix and are ready to provide the appropriate supply.
William Arthur Ward said that "The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails."
There has also been a strong shift in South East Queensland from an investor market to one which is catering to a growing level of owner occupier demand and the smart developers have already taken this into account in configuring their projects.
Five years ago, the majority of the apartment market was demanding more 1 bedrooms, 60 percent and balance was split roughly between 2’s (20 percent) and 3’s (20 percent). Overtime this moved towards a greater No of 2’s with the 3’s remaining static. Now with the current market turning more towards owner occupiers the mix is more 60 percent 2 bedrooms and 20 percent 1‘s and 20 percent 3’s.
There have been a number of developers who have also targeted their next projects to be boutique and smaller in size, focusing on inner suburban locations but away from the high rise nodes. Some have also diversified to commercial and mixed use, while others have focussed on age care or child care in an attempt to capture a share of a growth sector.
Some developers have even made the switch away from apartments and medium density to townhouse and land subdivisions as the market for this product has shown good positive signs in recent months.
A similar ripple effect has also taken place in the construction finance sector. In the previous year we saw most new projects placed by HoldenCAPITAL with the major banks and around 33 percent set with non-bank lenders. With the major banks effectively shutting their doors on many clients we have seen this balance shift significantly with nearly 66 percent of all transactions settled with the non-bank sector.
We have also seen a rise in the number of developers requiring swift finance solutions to secure sites having acquired the site, obtained their approvals and some even starting early works in an attempt to meet market demand only to be disappointed by their house banks declining the finance. While switching to a non-bank lender comes at a cost (between 2-4 percent in terms of the interest margin), many developers are finding that the time saved not having to secure the high presale commitments required by the banks (100 percent+ of the debt), enables them to start the project far sooner and to take advantage of selling to meet a current demand while constructing.
This massive shift toward non-bank finance is not a short term aberration and clients are finding that in many cases they have been much easier to deal with, require less constrictive terms and conditions and are capable of settling within quite short lead times. If you are finding that dealing with major banks stalling your project it might be time to see a construction finance expert and see what other options are available.
This article was written by Dan Holden of HoldenCAPITAL, who are a bespoke construction finance firm, they arrange construction finance and invest in projects through their equity fund, Queen Street INVEST. To discuss your project finance requirement please call (07) 3171 4200 or visit HoldenCAPITAL <a href="https://www.holdencapital.com.au" target="_blank">here</a>. <a href="https://www.holdencapital.com.au"></a>
 
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firstname-zEygzUaHDN

How developers face a changing property and finance market: HoldenCAPITAL

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GUEST OBSERVER
Advanced economies have essentially been in a low growth, low inflation and low interest rate nexus since 2008. There have been a few oscillations along the way, but the trend has been consistent throughout.
The Australian economy was able to decouple from the “3 lows” for much of that period due to a mining investment boom that left the economy with little spare capacity. As a result, growth, inflation and interest rates were significantly higher in Australia than in the G7 economies. But that has since changed and Australia has transitioned to the low inflation and low interest rate world, says the latest note from CBA Economics.
<a href="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%2011.12.07%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%2011.12.07%20AM.png" alt="">
While GDP growth in Australia has been solid, if not spectacular, domestic demand growth has been soft. And while the unemployment rate has trended down recently, it is still stuck above the level associated with full employment.
<a href="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%2011.13.36%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%2011.13.36%20AM.png" alt="">
In other words, there is slack in the Australian economy and this has led to record low wages growth and underlying inflation now running below the RBA’s 2-3 percent pa target band. The RBA has responded by cutting its policy rate to a record low of 1¾ percent. The latest rate cut can be put down to a change in the RBA’s assessment on the outlook for inflation because the Bank significantly downgraded its inflation forecasts in the May Statement on Monetary Policy (SMP). As a result, we expect further rate cuts to come in 2016 as the central bank seeks to further stimulate the economy. We see the RBA cutting to 1¼%.
This note explores the issues around spare capacity, wages and inflation in Australia and the implications for monetary policy.
<a href="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%2011.14.36%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%2011.14.36%20AM.png" alt="">
Spare capacity and the labour market
Labour market outcomes provide key indicators of spare capacity in an economy. In particular, the unemployment and underemployment rates are measures that show how far an economy is operating below its potential.
The unemployment rate that is commensurate with an economy producing around its potential output is generally associated with stable inflation. It is referred to as the ‘non-accelerating inflation rate of unemployment’ (NAIRU). The most recent OECD estimates of the NAIRU in Australia put it at 5.3 percent and Treasury estimates it to be 5.0 percent. Whichever way you slice it, the unemployment rate in Australia has been above the NAIRU for the past three years even though it is low by historic standards.
The underemployment rate, however, remains near its highest level on record. This indicates that the Australian economy is operating below its capacity and an output gap has opened up. This has had implications for wages and inflation.
While the output gap in the US has been closing (and core inflation has lifted a little), the reverse has happened in Australia over the past two years. An output gap has opened up primarily due to the end of the labour-intensive mining investment boom and resultant impact on jobs and domestic demand. GDP growth has been solid over that period, but domestic demand growth has been soft.
Decent GDP growth and weak domestic demand growth is reconciled by the strong contribution to growth from net exports. The big lift in resource export volumes is great for headline GDP growth. But mining production is not labour intensive like mining investment. As such, productivity in the resources sector has lifted, but headcount has fallen.
The underemployment rate tends to fly under the radar, but it’s a very usual measure of labour market slack. It provides a gauge of the proportion of people who are employed people but whose labour is not fully utilised. It is near its highest level on record. The sum of the unemployment rate and the underemployment rate produces the underutilisation rate which is the broadest measure of spare capacity in the labour market – it is high and presently sits above the level hit during the Global Financial Crisis.
The lift in underutilisation is also captured through the step down in average hours worked by full-time workers from late-2011. Average hours worked of full-time workers remains well down on its late-2011 peak.
Implications for wages
The lift in the unemployment rate and associated increase in spare capacity in the labour market has contributed to a slowdown in wages growth (both real and nominal). Since mid-2010, wages growth has eased and is currently running at its lowest annual rate since the 1990s recession.
The decline in wages growth has been broad-based across the private and public sectors, though the public sector slowdown has not been as pronounced. Most industries have experienced a slowdown in wages growth and the Wage Price Index is growing at a flaccid 2.1 percent pa (as at QI 2016).
The picture appears even softer when looking at Average Weekly Earnings (AWEs) which are running at just 1.5 percent pa. The WPI measures changes in wages across a range of industries (just like the CPI picks up price changes for a basket of goods), but it doesn’t pick up compositional changes in the labour market. AWEs, however, do. Growth in AWEs has declined by more than growth in the WPI because of the shift in jobs away from higher paying mining-related jobs towards lower paid services sector jobs.
The slowdown in wages growth due to a lift in spare capacity and increase in the unemployment rate was expected. But the historical relationship between wages growth and the unemployment rate suggests that wages growth has slowed by a lot more than would have usually been expected. We think that there are a few reasons for this. First, a more flexible labour force enables firms’ greater scope to limit wages growth due to slackness in the labour market. It may be that workers are willing to take lower wages growth for job security.
Second, the underutilisation rate has risen by more than the increase in the unemployment rate meaning that the change in the unemployment rate alone is not fully capturing the lift in spare capacity in the labour market. Third, job security fears have risen substantially over the past few years. Employees are less likely to look to negotiate a pay rise while job security fears are elevated. Finally, the terms-of-trade has fallen significantly which means that nominal income growth has supressed across the economy. This has effectively crushed wages growth by more than would have otherwise been the case.
<a href="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%2011.15.38%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%2011.15.38%20AM.png" alt="">
Implications for inflation
Headline inflation has slowed considerably in Australia and has been running below the RBA’s target band for the past six consecutive quarters. Underlying inflation has also slowed and the most recent print (QI) showed it was running at just 1.5 percent pa.
The impact of declining wages growth as a result of a lift in spare capacity has put downward pressure on non-tradables (i.e domestic) inflation. At the same time, tradables inflation has slowed primarily because of a big fall in the price of oil. This muted the impact that the lower AUD was expected to have on tradables inflation. The relationship between non-tradables inflation and wages growth is depicted in the chart opposite. As spare capacity in the labour market has lifted, wages growth has slowed and dragged down the rate of domestic inflation with it.
We expect domestic inflation pressures to remain weak primarily because spare capacity in the labour market will keep a lid on wages costs. Wages growth is unlikely to lift until the unemployment rate gets closer to the NAIRU. And we are some way off that. In fact, falling inflation expectations in Australia points to some further weakness in wages growth.
The NAB survey of businesses suggests that there has been a sharp decline in long run inflation expectations. Almost 70 percent of Australian businesses surveyed expect inflation to average less than 3 percent over the long run, more than double the proportion before 2012. Business long run expectations for inflation has been a good predictor for wage inflation and suggests earnings growth may slow further in 2016 (see chart opposite).
There are other forces, too, that are weighing on inflation. Rental growth, for example, has slowed considerably because dwelling supply has lifted, particularly in the apartment space. With further supply to hit the market over the next 18 months, rent inflation should remain weak. So there aren’t any forces on the near term horizon that point to a lift in inflation. Eventually the large fall in oil prices will ‘wash through’ the quarterly data prints. But even so, we expect the pulse of headline and underlying inflation to remain soft.
<a href="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%2011.16.53%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%2011.16.53%20AM.png" alt="">
Implications for monetary policy
The degree of spare capacity in the economy is an important consideration for monetary policy because it is the primary driver of domestic inflation. The RBA’s rate cut in May came purely down to the Bank’s concerns about entrenched low inflation and disinflation risks. Growth and labour market trends didn’t signal that more rate cuts were forthcoming. Indeed, falling inflation against an unemployment rate that is trending lower is rare.
The Minutes of the May Board Meeting suggest that the decision to cut rates was a finely balanced one. Specifically, “members discussed the merits of adjusting policy at this meeting or awaiting further information before acting”.
So the 50/50 market pricing going into the meeting was probably right. But the May SMP, published a few days after the rate cut, suggests that further policy easing is coming. The Bank made material downgrades to its inflation forecasts in the SMP, shaving ½ppt off its near term underlying and headline inflation forecasts. The RBA now expects both underlying and headline inflation to be 1-2 percent pa over 2016 (below the Bank’s target band). This points to further rate cuts, in our view.
Since the May interest rate cut a number of prominent economists, policymakers and commentators have come out questioning the RBA’s latest rate cut. Indeed, former RBA Governor Ian Macfarlane stated that, “the inflation targeting approach says that if inflation forecasts are below target, we should run an easy monetary policy – we already have that.
It doesn't say that each time we receive an inflation statistic showing it is below target, we have to cut interest rates." And former RBA Governor Bernie Fraser stated that, “I was a bit surprised by the rate cut on budget day because of the ambiguity that such a move is likely to create in the public mind. I wouldn't myself have been concerned about a short period of under 2 per cent inflation – not in the slightest.”
These comments are interesting food for thought. Indeed, we have our own view on whether the RBA should have eased policy in May. But for us market economists, what primarily matters is calling what the RBA is likely to do next and not what we think they should do. As such, we expect further monetary policy easing and have pencilled in two more rate cuts that would take the cash rate to just 1¼ percent. Current market pricing is indicating a terminal cash rate of 1.42 percent.
As always, the timing of picking rate moves is pretty tough. But we favour August and November as these dates follow CPI updates. In our view, all rate meetings over the near term are “live” and activity data will play a role in shaping market expectations and pricing over coming months.
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" target="_blank">here</a>.
 
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Why spare capacity is driving wages growth, inflation & rates down: CBA's Gareth Aird 

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GUEST OBSERVER
The bond market, even more so than the stock market, is often a key indicator of investor expectations and the overall health of the economy. 
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Figure 1 below shows the RBA reported bond yields on treasury bonds from 90 day bills to 10 long term bonds. We can see that from March to April this year, long-term yields decreased than short-term ones. 
<a href="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%208.10.58%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%208.10.58%20AM.png" alt="">
This is called “flattening” of the yield curve and is often a sign of lower investor confidence and a bleaker future outlook for the economy. From April to May, the op effect can be observed: while yields for all maturity dates decreased, the yield curve steepene slightly. The drop in short term yields reflects the RBA’s decision at the start of May to cut the cash rate by 25 basis points (0.25 percent).
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So what has happened since the interest rate cut? Figure 2 illustrates snapshots of treasury bonds being traded on the Australian Stock Exchange (ASX) on three separate occasions: one before the interest rate cut (19/04/16) and two after (17/05/16 and 15/06/16). Again, between the April and May snapshots, a similar effect to the above can be observed: short term rates decreased due to the interest rate cut and long term rates decreased slightly less.
<a href="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%208.16.12%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/06/21/Screen%20Shot%202016-06-21%20at%208.16.12%20AM.png" alt="">
 
However, since the May cut, short term rates have remained at about the same level, while long term rates, especially on bonds with 10+ year maturities, have continued to plummet. The yield on the longest duration bond (maturing in 2039) is down nearly 0.4% over the past month. This means that since April, the steepness of the yield curve has only increased by about 0.1 percent. 
An interest rate cut is designed to stimulate the economy and lift investor confidence. While this boost was achieved in the (very) short term, the threat of Great Britain leaving the EU, uncertainty about China’s future direction and an upcoming Federal Election to name a few have all but eroded the stimulus. 
With the Brexit vote on June 23rd and Australia voting on July 2nd, some of the shakiness may be resolved. However, both events have the potential to further upset economic conditions. If the latter occurs, expect another rate cut before the year is over.
For more information, <a href="https://secretagent.com.au/" target="_blank">click here</a>.
 
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Another rate cut may be due before the year is over: Secret Agent

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GUEST OBSERVER
The Housing Industry Association has released the latest edition of Renovations Roundup, the only regular review of Australia’s $30 billion home renovations market. 
Australia’s home renovations market is very much in recovery mode with 2015 marking the second consecutive year of growth. This followed a pretty nasty slump during the early years of the decade.
The recovery in renovations activity is being supported by the environment of remarkably low interest rates and very strong dwelling price growth in key markets.
 In this context, many homeowners have decided to shelve plans to move house and instead conduct major renovations work on their existing homes. The large pool of available home equity has made this possible.
However, the pace is growth is being held back by the weakness of earnings growth in the economy and the fragile condition of consumer sentiment.
The importance of home renovations activity is often underestimated – it accounted for about 35 per cent of total residential construction during 2015. With new home building set to decline over the coming years, the expansion of the renovations market means that its importance will only increase. 
The revival in renovations activity will provide a welcome offset to the more challenging situation emerging on the new home building side of the industry.
The Renovations Roundup projects that renovations activity will increase by 2.5 percent this year with growth of 1.7 percent forecast for 2017. HIA projects that activity will grow by 2.8 percent in 2018 followed by a 2.0 percent increase in 2019, bringing the total volume of renovations activity to $33.30 billion. 
Shane Garrett is senior economist for HIA and can be contacted <a href="https://hia.com.au/en/BusinessInfo/economicInfo/EcoGroup.aspx" target="_blank">here</a>.
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Renovations set to take up the mantle: HIA's Shane Garrett

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The Federal Treasurer Scott Morrison recently announced Dr Philip Lowe as the new RBA governor to replace Glenn Stevens, who has been head of Australia’s central bank for the past decade.
Dr Lowe will start his seven-year term in September this year at a time when the cash rate sits at a record-low 1.75 percent.
He has been RBA deputy governor for the past four years under Stevens, and had been long tipped in financial circles as the next governor. 
He first joined the RBA in 1980, the same year as Glenn Stevens, well before financial deregulation provided a platform for lucrative, glamourous careers for economists in the financial markets.
Back then the Reserve hired school graduates and supported them as part-time students. Lowe's first job at the Reserve was doing clerical work while attending night classes at the University of NSW.
Dr Lowe is well regarded in the central banking community, financial markets, and the Australian business community, and news of his appointment has not upset confidence in the institution.
We know about the monthly RBA meeting, but every morning, reportedly at precisely 8.50am, Stevens and Lowe along with three of the bank's assistant governors, meet to discuss the major issues of the day.
Sometimes the meetings only last five minutes, but can stretch out to 45 minutes.
Dr Lowe earned a PhD in Economics from the Massachusetts Institute of Technology after being awarded the University Medal for his undergraduate studies in economics at the University of New South Wales. He completed a doctorate at MIT in 1991, under the supervision of Nobel prize-winning economist Paul Krugman.
His appointment comes at a crucial time when central banks around the world are all wondering just what stimulus levers they actually have available in their management of their economies.
When Dr Lowe served as Head of the Financial Institutions and Infrastructure Division at the Bank for International Settlements (2000 – 2002), he authored important research on the financial stability role of central banks in low-inflation environments.
Something that afflicts the world currently, with one wise observer suggesting to me recently "we are all swimming in flat lemonade."
Lowe made his mark in a paper co-written with BIS economist Claudio Borio when he argued that even when inflation was tame, central banks should be wary of allowing low interest rates to fuel asset-price booms.
It was a then controversial view as in the US, the prevailing wisdom of the then-chairman of the Federal Reserve, Alan Greenspan, was that price booms were not the main concern of central banks. 
Lowe has a nice record back here of offering frank assessments on the challenges Australia faces.
He was especially vocal about lax lending standards in Australian banks during the property boom after inquiries on mortgage lending led to banks revising upward their total level of investor lending by some $50 billion.
Lowe has said we have got overly used to consumption growing more quickly than income.
He said we had gotten used to asset prices, credit and fiscal revenues growing more quickly than income.
We had got used to employment increasing more rapidly than the working-age population.
And we had got used to growth in our real incomes outpacing the rate at which we were improving our productivity.
One can hardly wait to glean what he thinks about the current, often reckless, search for yield by investors across all asset classes.
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September baton change for the RBA

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Australia’s largest member-owned financial services provider, CUA, today announced it was cutting fixed interest rates for owner occupiers by up to 0.43 percent p.a., with its 2-year fixed rate for owner occupiers falling to a low 3.96 percent p.a.
CUA is also passing on a range of fixed rate reductions for investors, with rate cuts of up to 0.33 percent p.a.
The new fixed rates are available for home loan applications fully approved from today.
Under the changes, CUA will now offer interest rates below 4 percent p.a. for owner occupiers across its 1-year (3.94 percent p.a.), 2-year (3.96 percent p.a.) and 3-year (3.99 percent p.a.) fixed rate home loans.
The fixed rates will complement CUA’s competitive variable rates, which start from 3.99 percent p.a. for its Fresh Start Basic (Owner Occupier) home loan.
Fixed rates for investors will start from 4.34 percent p.a. for the 1-year fixed rate loan.
The 2-year fixed rate for investors will fall to 4.36 percent p.a., while the 3-year fixed rate will be reduced to 4.39 percent p.a.
CUA’s General Manager of Products and Marketing, Jason Murray, said there are a lot of people shopping around for loans at the moment and the market is seeing an increasing number of borrowers considering fixed rate options.
"Now is a great time to lock in a very competitive fixed rate with CUA and benefit from being part of an organisation focused on helping our members,” he said. “These reductions in fixed interest rates will be welcome news for first homebuyers looking to get into the property market.
A full list of CUA fixed rates for owner-occupiers and investors, including comparison rates, is available online <a href="https://www.cua.com.au" target="_blank">here</a>.
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jonathanchancellor-7SQnKwU6yx

CUA cuts interest rates for investors

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The ratings agency S&amp;P said there would not be a sharp price correction in Australian housing.
S&amp;P analysts Craig Parker and Graeme Ferguson had a cautious view on Australian housing.
"We don't anticipate a sharp correction in house prices in the near term," the analysts said ahead of S&amp;P's annual property outlook event in Sydney today.
"However, a scenario of the early 1990s where unemployment reached 11 percent would place households under severe financial stress.
"The degree of severity would depend on the speed and depth of the downturn."
Mr Parker pointed to the increase in total consumer credit as a percentage of total household assets as a major reason behind the rapid house price appreciation in Australia warning that could be a risk. 
"The rising household debt has lowered the headroom if the economy were to deteriorate or when interest rates rise."
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Consumer credit growth poses housing risk if rates rise: S&P

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A recent report by NAB Economics speculates that 'helicopter money', money sent by a central bank to households or a fiscal stimulus funded by the central bank will be the next 'unconventional' tool used to combat established monetary policy tools that are either ineffective or exhausted.
According to NAB such helicopter money should result in some combination of inflation and real economic growth and has implications for interest rates settings, bank inflation targets and other aspects of central bank policy.
<a href="/images/2016/06/10/Screen%20Shot%202016-06-10%20at%2012.31.25%20PM.png" target="_blank">Click to enlarge</a> <img src="/images/2016/06/10/Screen%20Shot%202016-06-10%20at%2012.31.25%20PM.png" alt="">
"The fundamental choice open to a central bank is either to target the quantity of money or the price (‘interest rates’)... the only purpose in changing these rates are to influence market determined rates (i.e. those for home mortgages, business loans etc)," NAB said.
 "In the case where the monetary policy is not meeting its existing target – particularly where inflation is too low – helicopter money could be calibrated towards achieving that target rather than a new one. Indeed one of the reasons it is being advocated is the inability of central banks currently to meet their inflation targets.
"The two main ways it is expected to work in boosting the economy are: A direct boost to spending – most obviously when the Government is the ultimate recipient of the money and spends the money on goods and services – or by households lifting their spending (except in the unlikely event they save all the money they are given) and hHigher inflation expectations as a permanent increase in the base money should increase inflation. This in turn should reduce the real rate of interest giving households an incentive to consume now and business to invest.
"Proponents argue that it gets around some of the problems often raised with fiscal policy.
"With normal fiscal stimulus, the Government issues debt on which it has to pay interest. This can give rise to concerns about the future, e.g. of higher taxes causing people to save any tax cuts or cheques they are given. However, with Helicopter Money neither the government or households ever pay the money back and pay no interest. As a result households should see any increase in money they receive as an increase in wealth, or if Government is the recipient, it should be free to spend without adding to fiscal problems.
"Another concern with normal fiscal stimulus is that additional government debt can lead to ‘crowding out’ if higher government borrowing leads to higher interest rates. Again, as the monetary stimulus should put downward pressure on (real) interest rates crowding out is less likely (assuming there are unutilised or underutilised resources in the economy)."
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'Helicopter money' the next monetary policy tool

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Canstar advises that five year fixed rates terms can now be found at under 4 percent.
Thanks to the May cut in official cash rate, research and comparison site canstar.com.au advises that borrowers with some equity can now potentially lock in a home loan interst rate of less than 4 percent across all loan terms up to and including 5 year fixed.
“The cash rate is at a historic low and this is fantastic news for home owners wanting to refinance their mortgage,” said Canstar group manager, research &amp; ratings, Mitchell Watson.
“For the first time our database of more than 1,000 home loans is showing advertised interest rates of less than four percent across all loan terms, including 5 year fixed. Prior to the most recent rate cut the lowest 5 year fixed home loan advertised rate on our database was 4.34 percent; it’s now 3.99 percent for owner-occupiers.”
Current highest, lowest and average advertised home loan rates 
<table style="width: 476px;" border="1" cellspacing="0" cellpadding="0"><tbody>
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<td colspan="7" width="0">
Table: Residential Home Loan Market – Snapshot of the current market (3/6/2016)
</td>
<td colspan="2" width="0">
 
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</tr>
<tr>
<td width="62">
 
</td>
<td width="0">
Standard Variable
</td>
<td width="0">
Package Variable
</td>
<td width="52">
1 Year Fixed
</td>
<td width="0">
3 Year Fixed
</td>
<td width="0">
4 Year Fixed
</td>
<td width="0">
5 Year Fixed
</td>
<td colspan="2" width="0">
 
</td>
</tr>
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<td width="62">
Average
</td>
<td width="0">
4.64%
</td>
<td width="0">
4.35%
</td>
<td width="52">
4.35%
</td>
<td width="0">
4.31%
</td>
<td width="0">
4.66%
</td>
<td width="0">
4.70%
</td>
<td colspan="2" width="0">
 
</td>
</tr>
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<td width="62">
Min
</td>
<td width="0">
3.59%
</td>
<td width="0">
3.64%
</td>
<td width="52">
3.50%
</td>
<td width="0">
3.74%
</td>
<td width="0">
3.99%
</td>
<td width="0">
3.99%
</td>
<td colspan="2" width="0">
 
</td>
</tr>
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Max
</td>
<td width="0">
5.84%
</td>
<td width="0">
5.10%
</td>
<td width="52">
5.34%
</td>
<td width="0">
5.24%
</td>
<td width="0">
5.59%
</td>
<td width="0">
5.59%
</td>
<td colspan="2" width="0">
 
</td>
</tr>
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<td colspan="7" width="0">
Source: <a href="https://www.canstar.com.au/" target="_blank">www.canstar.com.au</a>, the search results do not include all home loan providers, and may not include all features relevant to you. Advertised rates of products on CANSTAR database
</td>
<td colspan="2" width="0">
 
</td>
</tr>
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<td width="62">
 
</td>
<td width="69">
 
</td>
<td width="0">
 
</td>
<td width="0">
 
</td>
<td width="0">
 
</td>
<td width="0">
 
</td>
<td width="41">
 
</td>
<td width="0">
 
</td>
<td width="12">
 
</td>
</tr>
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Table: Investment Home Loan Market – Snapshot of the current market (3/6/2016)
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</td>
<td width="0">
Standard Variable
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<td width="0">
Package Variable
</td>
<td width="52">
1 Year Fixed
</td>
<td width="0">
3 Year Fixed
</td>
<td width="0">
4 Year Fixed
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<td width="0">
5 Year Fixed
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<td colspan="2" width="0">
 
</td>
</tr>
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<td width="62">
Average
</td>
<td width="0">
4.86%
</td>
<td width="0">
4.63%
</td>
<td width="52">
4.55%
</td>
<td width="0">
4.53%
</td>
<td width="0">
4.84%
</td>
<td width="0">
4.88%
</td>
<td colspan="2" width="0">
 
</td>
</tr>
<tr>
<td width="62">
Min
</td>
<td width="0">
3.84%
</td>
<td width="0">
3.95%
</td>
<td width="52">
3.59%
</td>
<td width="0">
3.89%
</td>
<td width="0">
4.39%
</td>
<td width="0">
4.49%
</td>
<td colspan="2" width="0">
 
</td>
</tr>
<tr>
<td width="62">
Max
</td>
<td width="0">
6.03%
</td>
<td width="0">
5.37%
</td>
<td width="52">
5.34%
</td>
<td width="0">
5.34%
</td>
<td width="0">
5.69%
</td>
<td width="0">
5.69%
</td>
<td colspan="2" width="0">
 
</td>
</tr>
<tr>
<td colspan="7" width="0">
Source: <a href="https://www.canstar.com.au/" target="_blank">www.canstar.com.au</a>, the search results do not include all home loan providers, and may not include all features relevant to you. Advertised rates of products on CANSTAR database
</td>
<td colspan="2" width="0">
 
</td>
</tr>
</tbody></table>
“Investors aren’t quite as lucky, the minimum and average interest rates on offer are higher than for owner-occupiers. Nevertheless there is significant variance between rates on offer – definitely shop around,” said Mr Watson.
You can search for a home loan and <a href="https://www.canstar.com.au/compare/home-loans/?amount=400000&amp;profile=Buying+Next+Home&amp;repayment_type=Principal+%26+Interest&amp;state=NSW&amp;Loan+Type%5B%5D=Fixed+Loan+5yr" target="_blank">compile tables of the lowest-rate home loans on the Canstar database here</a>.
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