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.

Joel Robinson

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

&nbsp;

Developer GURNER™ Group has revealed $1.65 billion in residential sales nationally across the 12 months to December 2025, driven largely by the continued momentum of its Docklands wellness-focused precinct, Elysium Fields.

The sales result was generated across seven projects in Victoria and New South Wales, headlined by Elysium Fields, GURNER™’s $2.75 billion mixed-use precinct planned for Harbour Esplanade in Docklands.

The project has recorded more than $500 million in sales across the first three towers, equating to around 580 apartments sold.

The first tower, Helios, has now sold out of its 240 private residences, with GURNER™ preparing to release a premium penthouse collection comprising 15 three-bedroom penthouses in coming weeks.

[smartcode_project:default project_id=144441 project_image_fid=370975]

Elysium Fields is being developed on the long-held 20,000 sqm Docklands site at 208-226 Harbour Esplanade, which had remained undeveloped for more than two decades prior to GURNER™ taking over the project around four years ago.

Construction has now commenced across four towers ranging between 18 and 30 storeys, with Hamilton Marino and Maxcon appointed as builders.

Once complete, the precinct is expected to comprise around 1,100 residences, alongside retail, hospitality and public realm uses integrated throughout the site.

[smartcode_project:default project_id=144441 project_image_fid=370981]

Designed by Fraser &amp; Partners in collaboration with GURNER™ Design House, the project has been positioned around the developer’s broader focus on wellness-led residential living.

“We don’t sell apartments. We create a true luxury lifestyle that simply doesn’t exist elsewhere in the market today,” Founder and Executive Chairman Tim Gurner said.

“To deliver that requires an extraordinary level of detail, coordination and discipline across multiple verticals, from design and hospitality through to wellness and service.”

“We’ve always believed that living extends far beyond the physical residence. It’s about how you feel the moment you arrive, how you live day-to-day, and the ecosystem that supports that.” 
[smartcode_project:default project_id=144441 project_image_fid=370977]

The project’s design places a heavy focus on landscaping, wellness amenities and biophilic design principles.

Plans include around 3,700 sqm of landscaped gardens and open space throughout the precinct, alongside a retail and dining offering spanning approximately 5,000 sqm.

The broader public realm strategy centres around what GURNER™ describes as the “Path of Life”, an urban forest and landscaped pedestrian environment intended to connect the various buildings and wellness spaces across the precinct.

The apartments themselves will incorporate a range of wellness-focused inclusions, including purified air and water systems, circadian lighting, antimicrobial surfaces, and optional in-home wellness upgrades.

[smartcode_project:default project_id=144441 project_image_fid=370980]

Gurner said the company’s experience through its Saint Haven wellness clubs had directly informed the residential offering now being incorporated into Elysium Fields.

“We’re seeing a clear global shift toward longevity, performance and proactive health,” Gurner said.

“Our role is to deliver that in a way that feels seamless, highly private and beautifully resolved within the environments we create.”

A large component of the wellness offering is planned through the resident amenity and health facilities proposed within the precinct.

That includes plans for bathing and recovery facilities spread throughout the towers, incorporating mineral pools, saunas, steam rooms, flotation therapy, red light therapy and wellness lounges.

The developer is also seeking approvals for what it describes as a “reverse ageing medical clinic” within the precinct.

[smartcode_project:default project_id=144441 project_image_fid=370978]

According to project information released by the group, the proposed facility would include cryotherapy, IV infusion therapy, infrared and dry saunas, PEMF beds, MRIs, DEXA scans, brain scans and blood analysis services.

Within the first tower, Helios, residents will also have access to a dedicated amenity offering known as the Sky Private Club.

The upper 15 levels of the building will include private lounges, dining spaces, rooftop amenities and optional private wellness studios integrated within residences.

The Helios tower itself comprises 260 apartments ranging between 60 sqm and 300 sqm, including a collection of penthouses.

That includes a planned two-storey penthouse spanning around 600 sqm with uninterrupted bay views.

The Elysium Fields precinct is being delivered in partnership with Digital Harbour Holdings, a consortium that includes the Liberman family, which controls the development rights across the Docklands site.

[smartcode_project:default project_id=144441 project_image_fid=370979]

The sales result comes as GURNER™ continues expanding its national development pipeline beyond Victoria.

“We have a strong pipeline across Australia and are now focused on scaling into key markets including New South Wales and Queensland, while continuing to build on our Melbourne base,” Gurner said.

“We currently have more than $3 billion in the market, growing to over $5 billion by October, and expect to materially outperform last year in the 2026 calendar year.”

The result also reflects the continued strength of the upper-end apartment market in Melbourne, particularly for owner-occupier-focused product with large-scale amenity and lifestyle offerings.

[smartcode_project_cta:default project_id=144441]

Record result anchored by the Group’s “utopian” Elysium Fields precinct – defying market headwinds in Docklands.

Elysium Fields drive Gurner to $1.65 billion in apartment sales over 2025

National Australia Bank (NAB) will fund <a href="https://www.apartments.com.au/new-apartments/palmera-residences-gold-coast-18-garfield-terrace-surfers-paradise-qld-4217">Palmera</a>, a $1 billion, 52-level luxury residential tower being developed by Central Equity in one of the Gold Coast’s most tightly held coastal locations at Northcliffe.

The project, launched recently by <a href="https://www.apartments.com.au/developers/central-equity">Central Equity</a>, one of Victoria’s largest private residential developers, comes at a time when construction funding for large residential developments has become increasingly competitive as lenders tighten exposure to the sector.

Multiplex has been appointed the builder, and construction is now underway.

[smartcode_project:default project_id=108274 project_image_fid=365784]

Since its first project, Central Equity has delivered more than 85 residential developments with a combined end value exceeding $8 billion.

Palmera reflects Central Equity’s growing focus on the Gold Coast luxury apartment market and continues a relationship between Central Equity and NAB that dates back to the late 1980s, when the bank funded one of Melbourne’s earliest inner-city residential towers at a time when high-rise apartment living in the CBD was largely unproven.

“NAB’s funding of Central Equity’s $36 million CBD development in the late 1980’s to the financing of the billion-dollar tower today highlights the long-term relationship between the two organisations in delivering major residential projects” said Central Equity Founder and Chairman Eddie Kutner.

He said NAB’s early support was instrumental in helping establish the company’s development model.

“When we commenced our first residential tower in the late 1980s the concept of funding off-the-plan apartments was still largely untested in Australia,” Kutner said.

“NAB recognised the opportunity early and supported the project when others were uncertain. That relationship has now continued for more than 37 years across many developments.”

[smartcode_project:default project_id=108274 project_image_fid=365771]

Central Equity was established in 1987 when Melbourne’s CBD and Southbank precinct were still dominated by warehouses and commercial buildings. Fewer than 100 residents lived in Southbank at the time, and large-scale residential development in the inner city was not widely considered.

Recognising changing demographics and lifestyle preferences, the company began developing high-rise residential projects designed to bring permanent residents into the city centre.

Central Equity has provided accommodation for approximately 40,000 residents across Melbourne’s CBD and Southbank, while also incorporating supporting infrastructure including essential lifestyle facilities like retail spaces, childcare facilities and neighbourhood activity centres.

Central Equity has spent many years assembling the Palmera development site on the corner of Garfield Terrace and Frederick Street in Northcliffe, creating a supersite of around 3,300 sqm.

The developer said the Palmera apartment tower reflects its long-term view of the Gold Coast as a growing and increasingly diversified economy.

[smartcode_project:default project_id=108274 project_image_fid=365768]

Supported by infrastructure including the light rail network, major road upgrades expanded education, hospital and medical facilities and continued expansion at the Gold Coast Airport with more international and domestic flights.

Positioned in the tightly held Northcliffe precinct, the 52-level tower will deliver 347 apartments, targeting buyers seeking a high-end coastal lifestyle, from downsizers to interstate investors.

Designed by Marchese Partners with interiors by DBI, Palmera has been conceived as a next-generation residential offering, featuring a collection of oversized apartments, with premium three-bedroom residences offering sweeping northern views stretching from Surfers Paradise through to Burleigh Heads.

[smartcode_project_cta:default project_id=108274]

NAB funds $1 billion Surfers Paradise apartment development, Palmera

Two years after completing one of the newest developments in North Sydney, developer <a href="https://www.apartments.com.au/developers/aqualand-australia">Aqualand</a> is turning its attention to the rapidly evolving St Leonards apartment market.

The developer, which completed AURA by Aqualand on North Sydney's Walker Street, has lodged plans for a 5,918 sqm site at <a href="https://www.apartments.com.au/new-apartments/33-37-herbert-street-st-leonards-nsw-2065">33-37 Herbert Street, St Leonards,</a> seeking approval for a pair of residential towers rising above a shared podium opposite Royal North Shore Hospital.

The proposal forms part of the broader transformation underway across the St Leonards-Crows Nest precinct, where former industrial and commercial sites are increasingly being redeveloped into high-density mixed-use projects tied to major transport infrastructure.

<img alt="Aqualand" data-entity-type="file" data-entity-uuid="2cc428cf-fe70-4cac-9cd5-264ad53af62c" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-05-28%20at%209.51.56%E2%80%AFAM.png?VersionId=otKSnHtbjAvAddOnovyXQMgcAwE6DMe1" />

According to the planning documents, the site sits “within the St Leonards–Crows Nest Strategic Centre, identified by the NSW Government as a key area for accommodating future jobs and housing across Sydney.”

The proposal has been designed by fjcstudio, formerly FJMT Studio, and is being progressed through the State Significant Development pathway due to its scale and affordable housing provision.

The scheme would comprise 413 apartments, including 46 affordable housing units, alongside retail and commercial uses fronting Herbert Street. The project would also include communal open space, landscaping, a swimming pool, gymnasium, children’s play areas and podium-level resident amenities.

Planning documents show the development would consist of a part-13, part-39 storey tower form positioned above a four-storey podium.

“The development comprises a unified podium that activates the street interface, and two setback towers to accommodate new housing supply while maintaining an appropriate human scale at ground level,” fjcstudio noted in its Design Report.

The northern and southern towers have been shaped to respond to the surrounding skyline while also limiting overshadowing impacts to nearby public open space, particularly Talus Reserve.

The design report said the differing tower heights were intended to “contribute to a varied skyline while responding to the surrounding built form context and solar access considerations.”

<img alt="Aqualand" data-entity-type="file" data-entity-uuid="36da62dc-ff9e-41f2-a7e3-7be38373751c" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-05-28%20at%209.51.45%E2%80%AFAM_0.png?VersionId=Mo6Rp2r.XRLTzIfg_PEEpw8NepDH8UBs" />

The site sits directly opposite Royal North Shore Hospital and within walking distance of both St Leonards Station and the new Crows Nest Metro station.

While the site itself sits just outside the formal Crows Nest Transport Oriented Development boundary, the planning documents repeatedly reference its alignment with the broader TOD objectives reshaping the Lower North Shore.

“The site is located adjacent to St Leonards Station and in close proximity to Crows Nest Metro which is within the Crows Nest Transit Orientated Development Accelerated Precinct which has been identified by the NSW Government to support housing delivery,” the Design Verification Statement noted.

According to fjcstudio, the project has been designed to respond to the broader transition occurring across St Leonards, where increasing residential density is being concentrated around transport infrastructure and employment hubs.

“The broader precinct is undergoing significant change, with a mix of existing mid-rise buildings and newer high-density developments,” the report stated.

“Recent and approved projects indicate a consistent shift toward taller built form, typically organised as tower-and-podium typologies with more active ground levels.”

The proposal includes close to 6,000 sqm of retail and commercial space across the ground floor and podium levels, designed to create a more activated street edge along Herbert Street.

Aqualand’s plans would also introduce a landscaped podium shared between the two towers, with communal open space in the form of a podium rooftop designed to support resident interaction and improve urban greening outcomes. The scheme would also introduce pocket parks at the northern and southern ends of the site, including a landscaped area at the corner of Herbert and Ella streets designed to improve pedestrian amenity and soften the streetscape.

&nbsp;

The proposal is being progressed through the NSW Government’s Housing Delivery Authority pathway, which was introduced to accelerate housing supply across the state. The application was declared State Significant Development in April 2025 following an expression of interest process.

<img alt="Aqualand" data-entity-type="file" data-entity-uuid="faf6d97d-2671-454f-b85a-fe1c6a7be608" src="https://s3.ap-southeast-2.amazonaws.com/www.urban.com.au/s3fs-public/inline-images/Screenshot%202026-05-28%20at%209.51.49%E2%80%AFAM.png?VersionId=diVd28OBVr5.YV.7prrOz.uAanwwwm7a" />

St Leonards has been particularly active with new developments in recent weeks. Developer SP Setia’s <a href="https://www.apartments.com.au/news/nsw/first-look-sp-setia-targets-st-leonards-skyline-with-40-storey-tod-tower">plans for a new 42-storey tower</a> recently went on exhibition through the same pathway, while <a href="https://www.apartments.com.au/news/nsw/first-look-stockland-plans-52-storey-538-apartment-st-leonards-tower">Stockland’s 52-storey tower proposal</a> was also recently unveiled.

Aside from the St Leonards project, which is expected to take around nine months to move through the approvals process ahead of a potential 2027 launch, Aqualand is also preparing to launch Boronia, a new apartment project in Roseville comprising around 111 apartments on Larkin Street.

The developer also has approvals in place for the next stage of the Barangaroo precinct, which will feature new residential, retail, hospitality and community uses, alongside a new metro entry across the five-hectare site.

More than 50 new retail destinations are planned for Central Barangaroo, alongside a 270-metre-long boulevard connecting Hickson Park to Nawi Cove. Together with Harbour Park, more than 50 per cent of the precinct will comprise public open space and parkland.

First look: Aqualand joins St Leonards apartment party

Westpac

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EXPERT OBSERVER
While the month to month rise in sentiment is fairly muted, the survey detail suggests the Budget was well-received.
Sentiment over the course of the week showed a clear boost, with sentiment amongst those surveyed post-Budget 7.7% higher than sentiment amongst those surveyed prebudget – the most positive turnaround since we began tracking pre and post Budget responses in 2011.
The key issue will be whether this boost from the Budget is sustained. Certainly the ‘pre Budget’ print of 96.8 showed a further deterioration in sentiment from the previous print of 98.8, despite what was already quite a sharp 4.8% fall in March.
Persistent weak wages growth; falling house prices; and the perceived rising cost of living are all weighing on consumers.
This is best captured in the component of the Index – ‘family finances compared to a year ago’ – which declined 4.9% in April (showing little movement between pre and post Budget responses) and is down 9.6% on a year ago.
Click here <a href="https://www.propertyobserver.com.au/images/2019/4/10/Sent1.jpg" target="_blank">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/2019/4/10/Sent1.jpg" alt="">
That compares to the headline Index which is only down by 1.6% over the same period. The month’s survey included an additional question asking consumers about the impact they expect the Budget to have on their finances over the next 12 months. Responses again suggest the 2019 Budget was well-received. Around 15% of consumers expected it to improve their finances; 51% expected no change; and 22% expected it to worsen their finances.
While the overall balance is negative, consumers appear to carry a consistent negative view around budget assessments. At –8.5% the net improve/worsen reading is less negative than last year’s net –10.4% and easily the ‘best’ response we have seen since we began running this question in 2010 (the average reading being –26.6%).
Tax relief was again a key feature of this year’s Federal Budget with new measures building on the seven–year personal income tax plan announced last year.
The main near term measures are clearly targeted at ‘low and middle income earners’. Accordingly it is no surprise that sentiment showed more positive responses amongst consumers in these income groups – both the post-Budget lift and assessed impact on family finances were markedly more positive amongst consumers with incomes in the $60–100k a year range.
Click here <a href="https://www.propertyobserver.com.au/images/2019/4/10/Sent2.jpg" target="_blank">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/2019/4/10/Sent2.jpg" alt="">
Other factors that may have impacted sentiment in April include: a continued lift in the ASX, now up nearly 10% from its late 2018 levels; but negatives around petrol prices (average pump prices nationally up 18¢/litre since early February) and continued declines in house prices.
The month to month gain in sentiment was driven by a solid rise in expectations for the economy and family finances with some offsetting drag from weaker assessments around current finances and ‘time to buy a major household item’. 10 April 2019 
The Budget appeared to shore up confidence around the economy, which has had a shaky start to the year with choppy reads in the previous three months.
The ‘economic outlook, next 12 months’ sub-index rose 6.2% in April, regaining most of the ground lost in March.
The ‘economic outlook, next five years’ sub-index also rose 5.9%, retracing all of the previous month’s decline. Both sub-indexes are again in net positive territory above 100 and well above long run averages. Consumer views on family finances were much more mixed.
The ‘finances next 12 months’ sub-index posted a solid 4.1% lift, no doubt reflecting the tax measures at the centre of this year’s Budget. However, as discussed, the sub-index tracking assessments of ‘finances vs a year ago’ posted a sharp 4.9% decline in April to be down 9.6% on a year ago and at its lowest level since August 2017.
Attitudes towards spending also cooled notably with the ‘time to buy a major household item’ sub-index declining 2.0% to 115.5 in April (despite a 10.5% post-Budget lift). While that is still a positive read, it is below the levels seen a year ago and well below the long run average of 127. The readings around both current finances and ‘time to buy a major item’ remain consistent with the weak consumer spending growth seen through the second half of 2018.
Renewed confidence around the economy eased job loss fears a little in April. The Westpac-Melbourne Institute Unemployment Expectations Index recorded a 2.5% decline, retracing part of last month’s sharp 8.9% jump. Recall that lower readings indicate that fewer consumers expect unemployment to rise in the year ahead. At 127.4 the index is back below the long run average of 130”. Sentiment around housing improved in April. The ‘time to buy a dwelling’ index rose a further 2.4% to 119.4 in April, a four year high.
The index has now risen 33% from its mid-2017 low and is back around its long run average of 120. Improving affordability continues to see a lift in buyer sentiment in NSW and Victoria although in both cases there is still some way to go before buyer sentiment returns to long run average levels.
More surprisingly, the Westpac-Melbourne Institute Index of House Price Expectations posted a strong 11.9% rise to 95.6 in April, boosted by a sharp increase in New South Wales.
The Index is coming off a March reading that was the lowest level since we began compiling this index in 2009. The Reserve Bank Board next meets on May 7.
The Governor’s Statement following the April meeting saw a change in the wording of the key final paragraph. From our perspective, that change indicated a more flexible approach to interest rate policy than the ‘on hold’ stance we have seen since September 2016. The Board meeting in May will consider the staff’s revised growth forecasts for 2019 and 2020.
We expect these to be markedly lower than when last reported in February with growth tracking around or below potential. In those circumstances it is reasonable to expect the Board to move to a more formal easing bias in preparation for the first rate cut, which we expect to be delivered in August.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
 
 
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bevans-rYk9SxEa4r

Westpac consumer sentiment shows the Budget has been well received

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EXPERT OBSERVATION
As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50%.
However, our research shows that there has been a very significant change in the Governor’s Statement for this month. Recall that Governor Lowe has not changed monetary policy since he became Governor in September 2016.
Also note that the key concluding sentence, which has been used in every Statement since October 2016 has been “the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”. The clear implication behind that statement is an expectation that policy was likely to be on hold for a considerable period. As we have seen, that was an accurate assessment.
In the April Statement, he has changed this language for the first time ever. He still notes that “the Board judged that it was appropriate to hold the stance of policy unchanged at this meeting”. However, he then changes tact with a new sentence. “The Board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time”. Although, a cursory glance at this sentence might not indicate any change in stance, it does give greater emphasis to the fluidity of the current situation. If this change was not intended, then clearly he would have continued with the approach that has marked his time as Governor.
Therefore this change appears to be a very clear intention to signal that policy is much more ‘live’ than has been the case since the Governor was appointed.
This signal is consistent with Westpac’s expectation that the Board is likely to adopt an easing bias following the May Board meeting. Our thinking behind that approach has been that the Statement on Monetary Policy for May will include a downward revision of the Bank’s growth forecasts. Further support for this view is apparent in the exclusion of the RBA’s current growth forecasts in the April Governor’s Statement. Arguably, this indicates an uneasiness with the 3% for 2019 and the 2 ¾% for 2020.
In the RBA’s defence, note that the March Governor’s Statement came before the release of the December quarter National Accounts, which showed that six month annualised growth had slowed to 1% in the second half of 2018. We expect that the RBA will lower its 2019 growth forecast from 3% to 2 ¾%, and the 2020 forecast from 2 ¾% to 2 ½%. Those forecasts are either at or below ‘potential growth’ (assessed as 2 ¾%).
In commenting on the low growth rate for 2018 of 2.3%, the Governor pointed out “the GDP data paint a softer picture of the economy than do the labour market data”. Arguably, the RBA may hold off from a specific easing bias( despite forecasting below trend growth), attributing this tension in the data as key to the outlook for policy.
Westpac has argued that the actual rate cut will not occur until August, when a further downward revision of forecast growth will be required and evidence will be building of a slowdown in the labour market.
Last week, we wrote on the potential impact of tonight’s Federal Budget on monetary policy. If the Governor saw the Budget as a significant swing factor in his thinking, it is unlikely that he would have chosen to change the language in the Statement just before the announcement.
It is our view that a boost to disposable income from tax cuts will certainly be of some assistance to the economy, but is unlikely to sufficiently offset the near term drag on incomes and spending from the negative wealth effect from falling house prices; weak wages growth; and a major downturn in activity in the housing market.
We were a little surprised with the Governor’s change in stance but find it consistent with our general view that the RBA is on track to adopt an easing bias in May and cut the overnight cash rate in August and November.
BILL EVANS is Chief Economist for Westpac.
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Why one small change could signal a big shift in the RBA's thinking: Bill Evans

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Westpac are seeking to take market share as interest-only loans approach their expiry by offering a $2,000 rebate to new customers refinancing with them.
Westpac and its subsidiaries will offer the $2,000 rebate for anyone refinancing with a loan amount of over $250,000, according to the Australian Financial Review.
The group is also offering a $1,000 purchase rebate for every property bought with a loan amount of over $250,000.
A record $170 billion of IO loans are set to expire over the next two years.
Around 45 percent of the Westpac loan book last year was made up of interest-only loans, followed by Commonwealth Bank, the nation's biggest lender, who had around 40 percent.
According to a recent analysis by investment bank Morgan Stanley, IO lending is expected to fall from around 40 percent of the big four's total loan book at the height of the real estate boom in 2017 to around 20 percent by next year.
This year around 25 percent of major lenders' IO loans, which equates to around $104 billion, is set to expire, the investment bank's analysis showed.
 
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Westpac to offer new borrowers $2000 refinancing rebate on IO reset

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EXPERT OBSERVER
The six month annualised growth rate in the Westpac– Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from –0.37% in January to –0.56% in February.
The Index has now registered three consecutive months in which the growth rate has been negative. This is a strengthening signal that growth through the first two to three quarters of 2019 is likely to be below trend.
The signal from the Index is certainly consistent with the weak momentum in the second half of 2018 revealed in the print of the December quarter national accounts. In the second half of 2018 growth momentum slowed to an annualised pace of 1% from a 4% pace in the first half of the year.
Westpac expects growth in the Australian economy in 2019 to be around 2.2% – significantly below trend which is generally assessed as 2.75%.
Key to the ongoing slow growth will be a challenged consumer as households adjust to much slower wages growth than anticipated and falling house prices. That will be supplemented by a continuation of the contraction in residential house building activity that appears to have begun in the September quarter of 2018.
We have consistently highlighted these risks which are likely to coincide with a slowdown in jobs growth and investment spending as both political uncertainty and global volatility weigh on firms’ employment and investment decisions.
The Index growth rate has shown a significant deterioration over the last six months, declining from +0.47% in September to –0.56% in February. Five components have driven the deterioration: US industrial production (–0.31ppts); the S&amp;P/ASX200 (–0.30ppts); the Westpac-MI Unemployment Expectations index (–0.22ppts); the yield spread (–0.19ppts); and dwelling approvals (–0.10ppts).
The only component providing a partially offset is the commodity prices in Australian dollar terms (+0.12ppts). The contribution from the remaining components – monthly hours worked and the Westpac MI CSI expectations index – has been largely unchanged.
<a href="https://www.propertyobserver.com.au/images/2019/3/21/westpac%20.jpg" target="_blank">Click here </a>to enlarge:
<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/2019/3/21/westpac%20.jpg" alt="">
The Reserve Bank Board next meets on April 2. The minutes of the March Board meeting highlight the importance of data releases going forward with the key issue being the “tension” between soft activity indicators and strong labour market data. It will take time for the Bank to resolve those tensions but we expect that by the August meeting the case for lower rates will be clear.
At present the Bank is forecasting growth of 3% in 2019 and 2.75% in 2020. The signals, some of which are discussed in this release, are pointing to much slower growth. We expect the Bank’s growth forecasts to be lowered in both May and August with the forecasts in August being consistent with the need for easier policy.
Westpac expects rate cuts of 25 basis points in both August and November.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
 
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Leading Index growth rate firmly in negative territory: Bill Evans

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EXPERT OBSERVATION 
The deepening market downturn is starting to weigh more heavily on consumer sentiment towards housing. Both the complexion of this impact and the extent to which market weakening has outstripped weakness in housing-related sentiment provide important clues about some of the dynamics at play.
Consumers’ housing-related sentiment has deteriorated since November with negatives around price expectations and elevated risk aversion more than offsetting the boost from improving affordability. While sentiment overall is downbeat, the market performance has been markedly weaker than sentiment over the last year, suggesting that other factors are impacting. In particular, a tightening in loan standards from some lenders may have compounded what were already negative market dynamics following a drop in investor activity and initial price correction.
Nationally, the Westpac Melbourne Institute ‘time to buy a dwelling’ index has slipped 1.8% since November but is still up 8.6% year on year. Improving affordability continues to see a lift in NSW and Vic, the latter reaching a five year high in Feb. However buyer sentiment is still sub-par in these states while it has become a little more unsettled in other states.
Price expectations have been the big mover. The Westpac–MI Consumer House Price Expectations Index posted a sharp 11% drop over the three months to February, hitting a new historical low since we began compiling the index in May 2009. Weakness remains more pronounced in NSW and Vic, with just over half of consumers in these states expecting prices to be lower in a year’s time. That said, the more positive views in other states are also starting to show signs of softening with notable pull backs in Qld and WA.
These two aspects of housing-related sentiment highlight the ‘dynamics’ of the housing cycle. Price declines are currently dominating with negative expectations around prices likely to continue feeding into investor weakness and encourage buyers to delay purchases. At some point though, improving affordability should generate a bigger lift in buyer sentiment and a pick-up in demand that stabilises the market – exactly where that point is and how we get there remain more open questions.
<img src="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/image/Housing_Pulse/Housing_Pulse_Bites/2019-02/Housing-pulse-bite-2019-02-1.jpg" alt="">
Matthew Hassan is senior economist at Westpac. 
Read the full report: <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/Australia/2019/February/WestpacHousingPulseFebruary2019.pdf" target="_blank">Westpac Housing Pulse</a>. 
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What consumer sentiment is telling us about the housing downturn: Westpac's Matthew Hassan

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EXPERT OBSERVER
Changes to the Governor’s Statement were minimal with the issues around growth developments and the housing market still in flux.
As expected, the Reserve Bank Board decided to leave the Cash Rate unchanged at 1.50%.
There were minimal changes in the wording from the Statement following the February Board meeting.
In fact, at least in the February Board meeting, it was recognised that “some downside risks have increased” for the domestic economy. In this Statement, that downside risk is not mentioned. The Governor does point out that “other indicators suggest growth in the Australian economy slowed over the second half of 2018”.
Of course, the extent of this slowing will be revealed in the GDP report which prints at 11:30 am tomorrow. Westpac expects that the six month annualised growth pace in the economy will slow from 4 per cent in 2018 H1 to 1 per cent in 2018 H2. This spectacular slowing, even if at 1.5% in H2, is surely worthy of stronger language than seen in this Statement.
It is also no surprise that the Board still forecasts growth around 3 per cent this year. Any change will only be made following the May Board meeting.
There has been considerable uncertainty as to whether the Bank assesses falling house prices as a threat to household consumption. Some official comments deny the existence of significant wealth effects.
Today’s Statement seems to confirm that there is a concern of a wealth effect, “the main domestic uncertainty continues to be the strength of household consumption in the context of weak growth in household income and falling house prices in some cities”. That seems to indicate recognition of a wealth effect.
Commentary around the housing market is, surprisingly, slightly more constructive. In February, the markets were described as “weakened further”, whereas today’s Statement notes “conditions remain soft”. The data would indicate further deterioration.
The labour market continues to be described as “strong”, and the unemployment rate forecast of 4 ¾ per cent over the next couple of years is confirmed. Westpac expects that given a much softer growth environment, there will be a modest increase in the unemployment rate through 2019.
Conclusion
We are not surprised that the Governor chose not to repeat his commentary in a recent speech that prospects for interest rates are now evenly balanced. This commentary and the ‘rate hike’ commentary has never appeared in the Governor’s Statement and was limited to Board minutes; Statement on Monetary Policy; and some speeches.
We have to recognise that the Statement today is slightly more upbeat than we saw in February. As we later found out, the Board decided in February to restate the risks around interest rates to be more symmetric than had been the consistent practice through 2018.
Perhaps, that significant change required strong language, whereas today, despite no real encouragement from the data, it was considered more appropriate to be circumspect.
Nevertheless the changes are very small and the real issues around growth developments and the housing market are yet to unfold.
Westpac confirms its view that the RBA Board will decide to cut rates by 25bps in both August and November 2019.
BILL EVANS is the Chief Economist for Westpac
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Westpac still expecting RBA to cut rates in August and November: Westpac's Bill Evans

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GUEST OBSERVATION
Total employment lifted a very solid 39.1k in January well clear of the market median of 15k and a market forecast high of 27k. The year has started with a solid trend pace of employment growth with a three month average gain of 31.9k. In the year to December total employment grew 268.5k, or 2.2%yr, with a solid momentum into year end with a six month annualised pace of 2.2%yr. While it is just one month into the year, employment grew 271k in the year to January (2.2%yr) with a very solid 2.9%yr six month annualised pace.
There is, however, an important caveat for the January Labour Force Survey – January is the peak holiday month in Australia as Christmas, New Year and school summer vacation all come together. As such it is the month where little happens in Australia and economic activity stalls. In original terms total employment fell –234.5k in January (an average of –263.9k in the previous three years) so we are always cautious about reading too much into a January print.
The mix of employment gains also painted a very solid picture with a +65.4k gain in full-time employment only partially offset by a –26.3k loss in part-time employment. In the month total hours worked rose 0.4% (total employment rose 0.3%) as hours worked per person gained 0.1%. In the year to January total hours worked has lifted 3.2%yr which is a robust pace compared to the 2.2%yr pace for employment.
Despite the strong gain in employment, the unemployment rate was flat at 5.0% (market median was for 5.0%) as a 0.1ppt lift in the participation rate to 65.7% (65.72% at two decimal places) boosted the gain in the labour force to 45.7k.
 <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/2019/2/21/unemployment%201%20.jpg" alt="">
Source: Westpac
As 2019 starts, NSW picks up the mantle as the state with the strongest labour market. In the month, employment lifted 47.2k (161.6k in the year), unemployment fell to 3.9% (a new record low) and confirming this is a strong print (rather than a soft unemployment rate due to declining participation) NSW employment to population ratio has also hit a new record high of 62.6%.
 <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/2019/2/21/state%20employment%20.jpg" alt="">
Source: Westpac
In January Victoria continued to make gains (2.2k/114.2k in the year) but it was a different story in the other states. Queensland employment pulled back (–19.9k/5.6k in the year) while employment was flat in WA (0.8k/0.9k in the year) and fell in SA (–4.5k/1.6k in the year).
Victorian unemployment did lift in the month (4.5% from 4.2%) allowing NSW to clearly reclaim the mantle of having the lowest unemployment rate.
<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/2019/2/21/unemployment%202.jpg" alt="">
Source: Westpac 
Victoria was the state showing the greatest improvement through 2018 with the unemployment rate down almost 2ppts to 4.2% in December while in NSW unemployment fell just –0.5ppts to 4.3%. The Qld labour market appears to have stalled with the unemployment rate lifting 0.1ppt to 6.1% while it has been flat in SA at 5.9% and lifted in WA from 5.8% to 6.4%.
<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/2019/2/21/unemployment%203.jpg" alt="">
Source: Westpac 
We are closely watching how these trends continue through 2019 – NSW has surprised us by dipping below 4% while Victoria’s improvement looks to have stalled. Will this shift through the first half of 2019? How will these labour markets respond to falling house prices, a contraction in construction activity and weak retail sales. Our expectation is for the unemployment rate to rise in NSW and Victoria. 
It is also worth noting that 2018 produced a –0.2ppt decline in the underemployment rate from Q1 to Q4. In January there was a further improvement in underemployment to 8.2% (from 8.3%) the lowest print in underemployment since March 2015. Again we would caution that this is a January print so would not project that this improvement can be sustained but nevertheless, it is another indicator of just how robust the labour market was at the end of 2018.
For 2019 we are looking for a pause in the pace in employment growth due to the economic uncertainties surrounding the Federal Election at the same time as we expect to see a moderation in momentum in NSW and Victoria on the back of a moderation in housing activity. With reasonable estimates for the participation rate, our weaker jobs growth profile has the unemployment rate lifting to 5.5% in the second half of 2019 and further by end 2020.
Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a>.
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j.ballantyne1990-6AQqhLzZaK

Solid momentum behind Australian employment: Westpac's Justin Smirk

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EXPERT OBSERVATION
Westpac now expects the Reserve Bank to cut the cash rate by 25bps in both August and November this year.
We have revised down our GDP growth forecasts for 2019 and 2020 from 2.6% to 2.2%. With the slower growth profile we now expect to see the unemployment rate lift to 5.5% by late 2019. That makes a strong case for official rate cuts to cushion the downturn and, in turn, meet the RBA’s medium term objectives.
The Reserve Bank recently revised down its growth forecasts for 2019 and 2020 from 3.25% and 3.0% to 3.0% and 2.75% respectively. It also cut its estimate for 2018 from 3.5% to 2.75%.
Momentum in 2018 slowed dramatically through the year. The annualised growth rate in the first half was 4% whereas in the second half we estimate that the pace slowed to 1.5%.
Moving from a 1.5% pace to a 3% pace in 2019 seems to be a very large stretch.
Westpac’s growth forecast in 2019 and 2020 has been a much weaker 2.6% in each year but even that number now appears too high.
Our new forecast for GDP growth in 2019 and 2020 is 2.2%.
In particular, we have been expecting only a modest impact on consumer spending from the likely negative wealth effect associated with falling house prices in Sydney and Melbourne.
Our growth forecasts have assumed a lift in the savings rate across 2019 from 2.4% to 2.9%. That would be consistent with consumption growth of 2.4%. Note that we expect momentum in consumption growth in the second half of 2018 to be closer to 1.5%.
A more reasonable assessment of the lift in the savings rate in 2019 is from 2.4% to 3.5% with a lift towards 5.0% expected in 2020. Those savings rates imply consumer spending growth around 2%.
That lift assumes that house prices in Sydney and Melbourne will continue to fall through 2019. Our estimates of the need to restore affordability and the impact of tighter lending standards on prices point to falls of around 5%-10% in Sydney and Melbourne over the course of 2019 complemented by softness in other markets.
Absent any policy response from the RBA we expect that further falls will be necessary in 2020 before stability in these markets will be achieved.
These headwinds for the housing market and activity are also apparent in developments around credit. In the second half of 2018 new lending for housing fell by 14.9% with both investors (-15.5%) and owner occupiers (-14.7%) being affected. This is a sharper correction than
we had anticipated. These falls are a combination of both demand (concerns around falling prices and stretched affordability) and supply (new regulations and caution from some lenders in a falling market).
We expect these falls, albeit at a much slower pace, to continue through 2019 representing a negative feedback loop to prices.
That negative wealth effect is therefore likely to persist through 2020 with a further extension of the soft profile for consumer spending.
Other important dynamics will be around the sharp downturn in residential housing construction. We have revised down our forecast for residential housing construction in 2019 to –10% from –7% and –5% in 2020 from –3%. We also envisage a weaker profile for business equipment investment as businesses adjust their plans to a softening growth environment.
Overall we have revised down our GDP growth rates in 2019 and 2020 from 2.6% in both years to 2.2% respectively.
Consumer spending; residential housing construction and equipment investment are all key to the outlook for jobs growth.
With reasonable estimates for the participation rate our weaker jobs growth profile has the unemployment rate lifting to 5.5% in the second half of 2019 and further by end 2020.
Our process for forecasting monetary policy has always been to assume that the economy will evolve as we expect and then to anticipate the policy response once the authorities react to the new reality.
The decision by the Reserve Bank Board to accept the possibility that interest rates could fall further, despite the current record low levels, is profoundly important.
We can now be confident that if our growth profile does evolve the Reserve Bank will be prepared to act. Prior to this more balanced approach to rates it was reasonable to assume that it was most reluctant to lower rates. The view seemed to be that the adjustment in the housing market was a necessary development with limited spill over effects on the rest of the economy.
Lowering rates, as we last saw in 2016, would only disrupt that adjustment while the rest of the economy was not in need of further stimulus.
The approach now seems to be that the spill over effects to the rest of the economy are real and the “adjustment” process may be more substantial than earlier anticipated. Certainly the collapse in new lending and sharp falls in house prices would be attracting considerable attention.
Note that the current view of the Reserve Bank is GDP growth of 3% in 2019; and 2.75% in 2020. That profile is, in their view, consistent with a gradual fall in the unemployment rate from 5.0% to 4.75% by end 2020.
The rise in the unemployment rate which we envisage through 2019 will not be severe since unit labour costs are contained and labour enjoys a relative cost advantage over capital. However it will be contrary to the Reserve Bank’s expectations and prompt a significant revision to the 4.75% forecast for 2020.
When might this decision be taken?
The forces around a slowing economy, falling house prices, and weak consumer spending are already apparent. However the current forecasts do not indicate that the Bank expects these conditions to persist.
Recognition of this persistence is likely to take some time, but not too much time. Our preferred estimate would be the August Board meeting. A full explanation of the reasons behind the decision can be set out in the August Statement on Monetary Policy.
That timing will also allow two more inflation prints to confirm that the further widening of the output gap, as growth remains stuck well below trend, is constraining inflation with little likelihood of achieving the current forecast of 2.25% inflation in 2020.
A second cut at the November Board meeting is likely to follow.
Unlike the response of the markets in 2016 to two rate cuts we do not expect that these two cuts will immediately stabilise housing markets. However there will be sufficient progress for the Reserve Bank to resume its cautious stance.
Adjustments will also be accommodated by the Australian dollar, possibly in lieu of even lower rates.
Partially offsetting our weaker profile for the AUD will be more “patience” on the part of the Federal Reserve with the federal funds rate. Following my trip to the US over the last few weeks where I met with a number of officials and market participants it is clear that even if the Federal Reserve decides that higher rates will be necessary it will take considerable time to make the case.
Accordingly we have eliminated our forecast for hikes in the federal funds rate in June and September leaving one more hike in December to recognise the need to finally settle on the neutral rate setting.
The net impact of these forecast changes is for a further 25bp deterioration in the overnight cash rate differential. That puts downside risks to our current target of USD 0.68 for the AUD in the second half of 2019 particularly if the expected cuts from the Reserve Bank are ineffective in settling markets.
The Risks to This Rate Outlook
Housing markets may stabilise more quickly than we anticipate and the extended negative wealth effect may not materialise.
The labour market may hold up more strongly than we expect. (Note the January Employment Report showing 39,000 new jobs). Certainly evidence from other countries points to unusually strong labour markets despite other less constructive developments in these countries. A relative improvement in the cost of labour may hold up labour markets despite soft demand conditions. Unit labour costs in Australia have been flat for many years.
We may be overestimating the appetite of the RBA to respond to the environment we are describing.
Wages growth may lift more quickly than we expect, boosting household incomes and supporting spending despite a negative wealth effect. That lift may be supplemented by unexpected increases in the terms of trade as China boosts its own growth through housing and infrastructure. On the other hand while this is a perfectly reasonable scenario, there is still likely to be little flow through from higher commodity prices to household incomes as mining companies remain cautious. Mining wages continue to languish highlighting the limited effect a strong terms of trade has on the broader economy.
There is mixed evidence around wealth effects in other countries although the scale of the adjustment in house prices in Sydney and Melbourne is too large to downplay.
Conclusion
Since the last rate cut in August 2016 Westpac has consistently held the line that the RBA cash rate would remain on hold for the foreseeable future (a standard two to three year window). That has been despite markets, the RBA and most economists expecting higher rates.
To an extent this view was influenced by the perception that the Bank welcomed the adjustment in the housing markets and saw insignificant spill over effects to the rest of the economy.
The recent change of rhetoric from the Bank on that issue is important.
Our revised growth, inflation and unemployment forecasts now make a convincing case for lower rates.
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>.
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Westpac now expects the RBA to cut the cash rate twice: Bill Evans

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GUEST OBSERVATION
Through 2018, annual growth in China continued to decelerate, from 6.8% at March to 6.4% in December. The annualised pace in the December quarter was weaker still, circa 6.0%. These are outcomes reminiscent of the GFC low of March 2009, so it is not surprising that many in financial markets are concerned about 2019 and beyond. From the official PMI’s, a broad-based slowdown is evident across manufacturing and, to a lesser extent, services, led by a deterioration in external demand.
Regarding trade, it is important to note that the shock being experienced by China currently is having flow-on effects for the rest of Asia, especially the north-east Asia block. Taiwan and Korea have high exposure to China demand, shipping 31% and 27% of their exports respectively to China in 2018. A large bulk (45-57%) of Korea, Taiwan and Japan’s exports to China are machineries, reflecting these economies’ involvement in China’s production chain. These economies’ exports of machineries have been weakening since November, particularly Korea and Japan which saw their exports of machineries to China plunge by 15%yr and 14%yr respectively in December. Weak imports of upstream goods by China do not bode well for China’s export outlook in the months ahead. The impact from weakening external demand is also being felt in domestic production across the region, given the high correlation between production and exports in a number of Asian economies. More than half of the Asian economies we monitor registered manufacturing PMIs below 50 in January.
Although the market’s focus remains on the effect of the global slowdown and US/China tensions on trade, the key determinant of China’s softer growth in 2018 was actually structural change, planned and managed by China’s central government. Put simply, in pursuit of long–term financial stability and sustainable growth, 2017 and 2018 saw China’s economic authorities focus on the quality of growth, particularly its longevity; equitable distribution; and environmental impact, with far ranging implications.
While we cannot ignore the risks apparent in China’s external position, that the pursuit of ‘quality growth’ is at the core of this slowdown and given Chinese authorities’ capacity and willingness to aid momentum, we look to 2019 and 2020 first and foremost with optimism rather than concern, anticipating growth will be sustained around 6%. Below we outline the key effects of the pursuit of ‘quality growth’ across three sectors (trade; investment; and the consumer), and also assess recent changes to market policy to facilitate it.
<a href="https://www.propertyobserver.com.au/images/2019/2/19/china%20slowdown%201.jpg" target="_blank">Click here</a> to enlarge:
<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/2019/2/19/china%20slowdown%201.jpg" alt="">
Source: Westpac
The outlook for trade: opportunity close to home
The immediate threat to China from US trade policy is real and pressing. Following the pull-forward of activity to front-run the tariffs’ introduction, export growth is set to weaken in 2019. However, taking a longer view (2020 and beyond), it is important to remember that any negative shock can be offset in time.
The US only receives about 20% of China’s total exports. China therefore has considerable opportunity to grow total exports even if US trade remains under pressure. Further, the Belt and Road initiative provides scope for assembly and low-value-add parts production to be moved to neighbouring economies, where US tariffs do not apply. With these factories still owned by Chinese firms, US’ tariffs can be bypassed while preserving China’s profits. Doing so would have the additional benefit of making room within China’s borders for manufacturing to shift up the technology spectrum, to the nation’s long-term benefit.
This development path should, in time, facilitate the building-up of wealth and consequently discretionary consumption. Regarding consumption, higher demand for overseas travel (tourism and education) will remain a negative for China’s trade position. However, there is prospect for some of this drag to be offset.
As China’s domestic service industries continue to develop and Belt and Road linkages grow, opportunity to diversify China’s export base across services will multiply. Construction, financial services and in-bound travel are all good sectoral examples.
<a href="https://www.propertyobserver.com.au/images/2019/2/19/china%20trade.jpg" target="_blank">Click here</a> to enlarge:
<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/2019/2/19/china%20trade.jpg" alt="">
Source: Westpac
The outlook for investment: quality to remain key
The shift in policy in favour of quality growth was most clearly evident in the investment detail, as historically-troublesome forms of investment such as poorly-planned infrastructure investment by local government authorities was sharply curtailed. As a consequence, growth in fixed asset investment across the economy slowed to historically weak levels: a low of 5.3%ytd at August and 5.9%yr for 2018 overall, as investment by State-owned Enterprises effectively stalled at 1.9%yr.
With the initial re-orientation of the economy towards quality growth achieved, authorities are increasingly acting to boost momentum. This is happening on two fronts. First, local government authorities are being encouraged to borrow directly from the market to fund new infrastructure – here, a brief RMB1.3trn surge of issuance seen in the September quarter 2018 and the issuance pipeline for 2019 provides a basis for cautious optimism. Secondly, the reserves of banks are being released by cuts to the Reserve Requirement Ratio, –350bps over the past year.
Regarding bank lending, authorities are encouraging banks to focus on up-and-coming industries, where there is maximum long-term benefit for China. However, loan availability for established businesses and the household sector is also being supported.
In stark contrast, opaque elements of the non-bank sector (trust and entrusted loans) remain under pressure from new regulation. Most notably, trust funding from banks has been curtailed by their need to report trust asset exposures. Non-bank funding has also been severely reduced by the banning of guarantees on Wealth Management Products (WMPs) and a need to specify where funds raised from households via WMPs will be invested.
One element of the non-bank sector that is showing promise however is capital market issuance, particularly debt markets, with authorities looking to encourage large firms to preference market issuance over bank loans to fund their capital needs. It should be noted though that many banks are investing in debt market instruments rather than new loans – hence the desire to free-up bank lending for smaller businesses and households has not been a complete success.
In 2019, our core expectation is that growth in fixed asset investment will stabilise at or a little above its end-2018 level. This is low by historical standards, but as the average quality of projects developed should be materially higher than in the past, the dividend to growth should be much improved. Key to investment’s overall performance will be investment by the private sector.
In the near-term, stronger growth in the private sector will require continued active promotion by authorities. Looking further out to 2020 and beyond however, market forces should increasingly take over from the government as the driver and assessor of investment projects. For China and its business community, increased economic and political engagement within Asia offers open–ended opportunity that will drive successive waves of investment on and offshore. As above, both forms of investment hold opportunity for China’s long-term growth and wealth.
The outlook for the consumer: income distribution crucial
In 2018, consumption (by both households and government) was the primary driver of aggregate growth. This result was a continuation of a long-standing trend, although the scale of the acceleration in 2018 was atypical. If 2019’s contribution is to match that of 2018, then the consumer must be on a sure footing.
The cyclical downswing in external demand makes this difficult. Employment growth across both manufacturing and services has clearly been affected by weaker external demand which seems unlikely to improve quickly. There is therefore a pressing need for investment in the domestic economy to spur offsetting growth, and with it job and income creation.
This highlights the need for a further easing of financial conditions, to make funds available to private and public enterprise at low cost, as well as continued encouragement of infrastructure investment by local authorities. Greater education attainment and entrepreneurialism also needs to be fostered, to make ready the workforce for the opportunities to come, while long-term household wealth needs shepherding.
On wealth, housing remains the sector’s primary asset. To preserve affordability and opportunity, house price growth needs to spread across the tiers and be aligned to income growth. To do so, a tight rein over investors will remain necessary to avoid the wealthy profiting from households down the income spectrum.
Further progress is also needed in the management of wealth ex-housing. The changes made to WMPs are a start, but new well-structured product now needs to be developed by the industry and invested in by households for the long term.
Policy and markets
Access to credit the priority
Recent monetary policy easing has had two inter-related targets, promoting lending to small enterprise and reducing funding costs.
Monetary policy has been eased since late last year, with the TMLF (targeted medium-term lending facility) launched on 19 December (with the first auction on 23 January) and given additional re-lending of funds. At the turn of the year, there was also a relaxation of the criteria for banks to enjoy lower reserve ratios (referring to the targeted reserve ratio cut announced back in January 2018). The eligibility for access to various liquidity facilities is mainly linked to the amount of loans extended to small enterprises. These policies apparently aim to encourage and support lending to small enterprises, and are in line with the policy direction expressed in the earlier economic work conference, which continued to use “prudent” to describe monetary policy but dropped “neutral”.
Another policy aim is to reduce funding costs. Most of the liquidity released via the 100bp cut in the Required Reserve Ratio (RRR) in January was to cover maturing MLF (medium-term lending facility) in Q1. Liquidity via a lower RRR is longer lasting, and the cost of funding much lower. Consider the 1yr MLF rate at 3.3% versus the 1.62% interest rate on required reserves; for the CNY1.2trn of MLF replaced, interest cost is reduced by CNY20bn. Provision of more long-term and low-cost liquidity is warranted to encourage lending to support constructive economic activities – in line with the official stance of adopting more counter-cyclical measures to promote growth.
Outright rate cuts?
There is an opinion in the market that the PBoC may need to cut interest rates. At this stage, we still believe that quantitative tools are more likely to be deployed. If there is an interest rate cut, it is more likely to be in bank lending rates than OMO (open market operation) reverse repo rates. First, funding costs can be effectively lowered through the use of different liquidity facilities, without an outright interest rate cut. Second, when it comes to getting OMO rates and bank lending/deposit rates more in line with each other, our interpretation is that the higher bank rates ought to be brought nearer OMO rates. That said, if the benchmark 7-day repo rate falls near the 2% level and stays there sustainably, then the PBoC may need to adjust OMO rates to play catch-up.
De-leveraging goes slow
While the de-leveraging campaign may still be on the agenda, it has been progressing less aggressively since Q4-2018. The shadow banking sector – proxied by the three off-balance sheet items under aggregate financing – shrank at a less rapid pace during Q4-2018 than in earlier quarters, and rebounded in January. The growth in RMB loans has not been quick enough to absorb the loan demand diverted from the shadow banking sector. This may justify a less aggressive de-leveraging campaign as a transitory solution, before credit accessibility is further enhanced via both bank loans and the capital market.
Bond supply versus inflows
An easing monetary policy backdrop and sustained bond inflows are supportive of the bond market. We expect bond yields to consolidate around current levels towards end-Q1 amid potentially heavier supply before facing renewed downward pressure later in the year. There may be heavier cash bond supply in Q1 than usual. First, the special LGB (local government bond) issuance quota for 2019 has been front-loaded, and the full-year quota is also touted to be a 60% increase over last year’s. Gross issuance of special LGB totalled CNY76.9bn in Q1-2018, representing a meagre 4% of 2018 full-year gross issuance. This amount can be easily surpassed in Q1-2019 if primary market activity starts to pick up in late February/early March. Second, the implication from the Central Bank Bills Swap (CBS) is a combination of neutral liquidity impact but with potentially more cash bond supply – though these bonds do not directly compete with CGBs (China Government Bonds).
There is likely to be a further easing in liquidity and credit through the year. We have pencilled in a 100bp RRR cut in each of the quarters from Q2 to Q4 this year. After cash bond supply is absorbed, we expect renewed downward pressure on yields and rates. In addition, bond index inclusion could mean sustained bond inflows. The confirmation of inclusion of Chinese bonds into the Bloomberg Barclays index had been well anticipated. Assuming a total of USD2.5trn of funds track the index, we believe index inclusion will lead to up to USD150bn of potential inflows over a 20-month period, or CNY50bn per month. This equates roughly to the average monthly inflow into CNY bonds in 2018.
CNY: no obvious outflow pressure
<a href="https://www.propertyobserver.com.au/images/2019/2/19/CNY.jpg" target="_blank">Click here</a> to enlarge:
<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/2019/2/19/CNY.jpg" alt="">
 
Source: Westpac
We now expect the next US rate hike to come in June instead of March. Hence upward pressure on USD/CNY triggered by USD strength is likely to be delayed. That said, trade relations remain a swing factor, while the impact of tariffs on the regional supply-chain is already evident and the outlook subdued. On balance, USD/CNY is likely to trade in ranges with mild upside risk.
USD/CNY should face strong resistance at the 6.85-6.90 area. Indicators including banks’ FX sales and settlement, PBoC forex purchase, and foreign reserves do not point to obvious outflow pressure. The potential bond inflows triggered by index inclusion is significant compared with other BoP items, and should present a key support to the CNY in the face of our expected USD strength going into the second half of the year.
The USD/CNY forward points have been falling until recently, as US-China interest rates differentials were compressed. The offshore USD/CNH forward points fell alongside, closing the gap with onshore. We view the movement in offshore points as primarily driven by onshore, while there has been a minimal addition to offshore CNH liquidity through the two main channels – stock flows and trade flows. As the onshore-offshore forward point differentials have narrowed and with CNH liquidity limited, CNH forward points may become more sensitive to any change in liquidity condition onshore or offshore.
Elliot Clarke is a senior economist at Westpac and can be <a href="https://www.westpac.com.au/news/authors/elliot-clarke/" target="_blank">contacted here.</a>
Frances Cheung is the Head of Macro Strategy Asia at Westpac. 
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China in 2019 - headwinds and opportunity abound: Westpac

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EXPERT OBSERVATION
The RBA has started the year with a significant shift, lowering its growth outlook and acknowledging greater uncertainties and downside risks.
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The RBA has started the year with a significant shift, lowering its growth outlook and acknowledging greater uncertainties and downside risks. While the Board still expects the economy to track towards its employment and inflation targets, and does not see a strong case for a near term change in the cash rate, there has been a clear change in emphasis.
In particular, the Governor has moved from the view, expressed throughout 2018, that “the next move in the cash rate was more likely to be an increase than a decrease” to one in which the probabilities of the next move being up or down are “more evenly balanced”.
This move to a balanced rate outlook is significant because it clearly establishes that the Bank is prepared to contemplate rate cuts - a position that has really only emerged since the housing markets have reversed. It is also consistent with changes announced by other central banks notably the US Federal Reserve. We see these changes as a welcome shift, bringing the RBA’s thinking more into line with our own.
As expected, the Reserve Bank Board again left the cash rate unchanged at 1.5% at its February meeting. Also as expected, the Bank has lowered its forecasts for growth – outlined in the Governor’s decision statement and detailed more fully in his speech a day later.
The RBA’s growth forecast for 2019 has been revised down from 3¼% to 3%, and its forecast for 2020 revised from 3% to 2.75%, the slowdown year to year reflecting a tapering in resource export volumes. It is significant that growth on average is still expected to be around the ‘trend’ rate of 2¾%.
The RBA has also revised its inflation outlook with the forecast for underlying inflation for 2019 reduced from 2¼% to 2%, while the 2020 forecast remains at 2¼%. The Bank is maintaining the view that inflation will gradually move into the 2-3% band, although it is expected to take somewhat longer than previously expected. There are good reasons why the Bank lowered its growth forecasts.
Firstly, while it still assesses the outlook for global growth as “reasonable”, it recognises that “downside risks have increased” (notably, when asked to rank the risks to the economic outlook, the Governor still nominates ‘global’ issues as a bigger concern).
Secondly, it has made some significant changes around the household sector and housing.
For some time, Westpac has argued that the fall in house prices in Sydney and Melbourne would be associated with a negative wealth effect weighing on consumer spending. In the RBA’s previous writings, it tended to dismiss this prospect.
Although it is still downplayed, the Governor’s latest speech gives more weight to the issue, noting that rising housing prices provided an offset to slow income growth for some households and this effect is now shifting but that an expected pick-up in household disposable income was seen as providing a counterweight to the wealth effects of lower housing prices.
Specifically, consumption growth is expected to hold at 2.75% in line with disposable income growth, implying a stabilisation in the savings rate. This ‘housing-consumer nexus’ is seen as a key area of uncertainty. It remains the key point of difference between Westpac’s 2.6%yr growth forecast for this year and next and the RBA’s at or above trend view.
Westpac has also argued that residential housing construction would be a drag on growth in both 2019 and 2020. The RBA did not support that view, referring to a strong pipeline and only a gradual decline. Recent falls in dwelling approvals, across both high rise and non high rise segments, are now pointing more clearly to a significant drag on growth from the housing construction downturn.
Accordingly the RBA has downgraded its view, the Governor indicating dwelling investment is forecast to decline by about 10% over the next two and a half years.
The RBA continues to see rising business investment and higher levels of public infrastructure spending as the key growth drivers. It also remains positive about the labour market, reaffirming its forecasts for the unemployment rate to fall further to 4¾% by the end of 2020 and an associated lift in wages growth.
The Reserve Bank’s revised view has narrowed the gap with our own but Westpac remains more downbeat. Even so, our weaker forecasts have not been weak enough to warrant forecasting a rate cut. Accordingly, even if the RBA moves further towards Westpac’s current view it seems likely that rates will remain on hold.
The threshold for policy is whether spillovers knock the labour market off course. Our current forecasts do not incorporate that prospect but we acknowledge downside risks. 
Read full report <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/Australia/2019/February/er20190208BullInterestRates.pdf">'Australian interest rates' (PDF 77kb)</a>
BILL EVANS is Chief Economist for Westpac
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