Australian housing finance rises 9.5% in Q4

Australian mortgage lending surged in the December quarter to reach new record highs on the eve of the RBA's February rate hike. The value of new commitments rose by 9.5% in the quarter ($108.3bn), underpinned by a 5.1% rise in loan volumes (149.4k). Key factors supporting demand included the RBA's easing cycle (75bps in 2025), first home-buyer incentives, and population growth - all reflected in housing prices that rose in the order of 8-9% on a nationwide basis in 2025 according to Cotality.  

Activity in the domestic mortgage market was very strong through the back half of last year - strength that has caught the attention of the RBA and APRA through earlier measures to curb riskier lending. Lending ended the year at a record high of $108.3bn on the back of a 9.5% rise in the December quarter, increasing by 21.5% across the back half of the year - compared to growth of just 1.5% in the first half. The acceleration looks to reflect the RBA's 3 rate cuts (75bps total), and expanded measures by the federal government to help buyers with low deposits enter the housing market.

Accordingly, first home-buyer lending surged by 15.5% in the quarter - the strongest rise since the Covid period - to $19.3bn, just short of the record high from 2021. But loan volumes to the segment, despite lifting 6.8% in the quarter to 31.8k, were still more than a third (34%) below the Covid peak - a combination of factors that point to affordability pressures. According to today's release, the average loan written to first home buyers was around $608k as of the December quarter.

Lending to the two major segments - owner-occupiers and investors - was at record highs. Owner-occupier lending was up 10.6% for the quarter - its fastest gain since Q1 2021 - to $65.3bn. That was matched by 4.8% lift in underlying loan volumes to 89k. In the investor segment, lending rose by 7.9% across the quarter ($43bn) and there was a 5.5% increase in loans written (60.4k).  

Australian household spending tails in December

Australian household spending tailed as 2025 wound down, notching its first monthly decline since March 2024 with a 0.4% fall in December - a downside surprise on expectations (0.1%). Spending rose strongly through October (1.4%) and November (1%) alongside an extended Black Friday sales period and a busy calendar of major events. That strength in consumer demand - a key factor in the RBA hiking rates at last week's meeting - translated into a 0.9% rise in quarterly volumes.   

The ABS's Household Spending Indicator (a high frequency measure of bank card spending) clocked spending declining by 0.4% in December - its first month-on-month fall since March 2024. Spending accelerated in October (1.4%) and November (1%) on the back of growth in discretionary sales (1.8% in October and 1.2% in November) during the Black Friday sales and associated discounting as well as major sporting and cultural events. Discretionary spending then pulled back in December (-0.3%), as illustrated in the chart below, with notable declines seen in furnishing and household equipment (-1.7%), clothing and footwear (-2.4%), and recreation and culture (-0.5%). Hotels, cafes and restaurants (0.5%) were able to resist that pullback.       

Household spending in nominal terms lifted by 2.2% across the December quarter - the strongest quarterly rise in 3 years. In real or inflation-adjusted terms, spending saw a 0.9% rise in the December quarter to be up by 2.4% through the year. Strong gains in the quarter were recorded in clothing and footwear (4.1%), furnishing and household equipment (3.6%), and hotels, cafes and restaurants (1.5%).     

The 0.9% lift in quarterly volumes is a solid guide to growth in household consumption (HCFE) - the largest component of GDP - in the National Accounts. However, the HSI does not capture the totality of bank card transactions, and it also excludes major items such as rents, electricity, insurance and education.     

Macro (Re)view (6/2) | Hawkish RBA supports AUD

The postponement of the key nonfarm payrolls release for January until next week left markets with second tier US data and reporting results to focus on. Tech-related plays hit US and Asian equities this week on concerns that capex plans are escalating amid uncertainty over the return on investment from AI infrastructure. This was a factor in the USD seeing a modest rebound (still down 9.6% on 12 months ago) - though the local AUD remained supported following a hawkish hike from the RBA - while the BoE was dovish in holding and the ECB offered little resistance to euro strength. Next week's highlight is that delayed US payrolls report (Wed) as well as CPI data for January (Fri).    

A largely uneventful ECB meeting saw the Governing Council leave rates hold - the key depo rate remaining at 2% - with President Lagarde reaffirming the existing view that policy settings are 'in a good place'. The main interest was whether any cracks would emerge in that stance given the strength in the euro - ostensibly a headwind for growth for the export-oriented euro area economy. But at the post-meeting press conference Lagarde downplayed the effect of the exchange rate, pointing to the fact that EUR/USD was currently around its average level since its inception. Market pricing was unchanged for the ECB to remain on hold through the year. 

In another tight decision (5-4 majority), the BoE went back to holding rates (3.75%) after cutting by 25bps in December. Pre-existing market pricing for a June rate cut was vindicated as the statement noted 'Bank Rate is likely to be reduced further', while new forecasts in the quarterly Monetary Policy Report were unambiguously dovish. The outlook for growth and the labour market were downgraded, and inflation is now expected to undershoot the 2% target in 2027 and 2028. Governor Bailey at the post-meeting press conference said the key judgement underpinning the view that there was scope for lower rates reflected diminishing inflationary pressures. Softer demand conditions and an easing labour market are expected to see wage growth continue to ease, while the impact of the National Insurance increase will also fade out.     

The RBA hiked the cash rate by 25bps to 3.85% this week, recent data convincing the Board that the economy was more capacity-constrained - and inflation pressures were more persistent - than previously thought. New forecasts in the Statement on Monetary Policy helped shape that assessment. The inflation outlook was raised to be above the midpoint of the 2-3% target band through the next couple of years, with the labour market now expected to be tighter and growth stronger in the near term. A hawkish repricing followed as markets adjusted to the scenario of the RBA potentially hiking twice more this year, up from the single additional hike already priced.  

The key shift in the Board's thinking was that there was an excess demand component to inflation overshooting the target (3.6% headline and 3.4% core), adding to the existing pressures from price rises deemed more temporary - such as electricity with government rebates ending. Governor Bullock's comments at the post-meeting press conference and at the parliamentary testimony later in the week indicated the Board will retain its existing strategy, using monetary policy to gradually turn the tide on inflation in order to preserve the labour market. Markets therefore think back-to-back hikes are unlikely, pricing in the next increase in the cash rate for the May meeting. For more on this week's meeting, please see my review here. Also in Australia this week, data updates for December showed a pullback in dwelling approvals (see here) and a widening in the monthly trade surplus (see here). 

Australia's trade surplus widens to $3.4bn in December

Iron ore exports drove a widening in Australia's trade surplus to $3.4bn in December - though that was slightly below expectations ($3.5bn). Resurgent demand, a key factor in the RBA hiking rates on Tuesday (see here), was reflected in a sharp rise in import spending in the December quarter (4.2%), compressing the quarterly trade surplus to $10.3bn - its lowest level in more than 5 years. 

Australia's trade balance - the spread between export earnings ($44.6bn) and import spending ($41.3bn) in goods trade, both in AUD terms - was in surplus to the tune of $3.3bn in the month of December, up from $2.6bn in November. The trade surplus remained on its narrowing trajectory in 2025. This continued the descent from the extraordinarily high levels reached during the pandemic recovery when export revenue flooded into government and company coffers as commodity prices soared and borders reopened. In the December quarter, the trade surplus was $10.3bn - down from $14.9bn in Q4 2024 and settling at its lowest level since Q3 2020. 

Export revenue increased by 1% in the month of December to $44.6bn, up 3.7% on 12 months earlier. The key movement was metal ores and minerals (predominantly iron ore), with the value of those exports rising by 3% to $14.2bn. ABS data indicated this uplift reflected a large rise in shipments to offshore markets, as prices of the commodity were recorded to have fallen in December. Meanwhile, rural exports - including meat and other produce - rose for the third month running (2.5%), lifting to a new record high of $7.1bn. Non-monetary gold exports notched back-to-back declines in December (-0.9%) but still had a stellar year, with exports more than doubling (107.9%) on the back of safe-haven demand and central bank buying.   

For the December quarter, exports rose by 3.3% - remarkably this was their strongest quarterly movement since Q2 2022 - to come in at $134.8bn, an elevated level but well off the record highs around $155bn a few years ago. The rise in quarterly exports looks to be almost entirely price-driven; the ABS reported last week that export prices increased by 3.2% in Q4. 

Spending on imports declined by a modest 0.8% in December to $41.3bn, which followed a 0.2% fall in November. But those movements belied the broader trend in the quarter, which saw spending accelerate by 4.2% - its fastest quarterly rise since Q3 2022 - to a record high of $124.5bn. According to the ABS, import prices were only up by a moderate 0.9% in Q4 - indicating that rising demand was the key factor behind the acceleration in spending. 

Consumption goods rose by 2.2% in the quarter on the back of gains in categories such as food (3.9%), clothing and footwear (0.9%), household appliances (0.9%) and vehicles (0.4%). Capital goods - associated with business investment - slowed (-0.9%) after surging in Q3 (4.1%). Meanwhile, intermediate goods posted a 3.4% rise in Q4 - despite a fall in fuels and lubricants (the largest category) as oil prices declined.   

RBA hikes cash rate in February

The RBA hiked the cash rate by 25bps to 3.85% in a unanimous decision by the Monetary Policy Board at today's meeting in Sydney. Inflation moving further above the 2-3% target band reinforced the RBA's concerns that capacity pressures are arising amid robust demand and labour market conditions, prompting today's hike. And more are likely to follow. The RBA lifted its inflation forecasts - core inflation is expected to remain above the midpoint of the band over the next couple of years - leading markets to price in price in two further rates hike this year - one more than previously expected. If delivered, that would reverse the RBA's three rate cuts from 2025.  

 

Today's meeting proved to be more hawkish than markets had expected - despite a rate hike being widely touted. Markets came into the meeting pricing in two rate hikes this year, but new forecasts published in the Statement on Monetary Policy - that factored in that outlook for interest rates - still showed materially higher inflation was now the base case for the RBA. Forecast inflation this year was lifted from 3.2% to 3.6% in headline terms and from 2.7% to 3.2% on a core basis. Upward revisions were also seen in the forecasts for 2027 (2.7% from 2.6% for both measures), with inflation still remaining slightly above the midpoint of the band into 2028 (2.6% headline and core). Furthermore, the forecasts also signalled a stronger near-term growth outlook and tighter labour market conditions are now expected by the RBA. 

In response, markets now expect a total of three rate hikes this year - the next two most likely going through at the quarterly 'forecast' meetings in May and August. At the post meeting press conference, Governor Bullock said the overall strategy of returning inflation to target without coming at the expense of its full employment objective was still guiding the Board - pointing to a gradual tightening cycle this year. That said, the reacceleration in inflation over the back half of last year has clearly surprised the RBA, as has the strength in the economy and the labour market.  

Last week's December quarter CPI data confirmed a further overshoot of inflation to the target band: headline inflation lifted to 3.6% year-on-year and the core rate rose to 3.4% year-on-year. Governor Bullock attributed part of the inflation overshoot to temporary price increases (such as electricity rebates unwinding and holiday travel) but also said that inflationary pressures in other parts of the basket (services and new dwellings) were more likely to persist. 

Elevated inflation indicated to the Board more generally that the pick-up in private demand from household spending and business investment was testing the supply capacity of the economy after years of weak productivity growth. That was backed up by GDP growth surprising to the upside at 2.1%Y/Y in Q3, while the labour market had remained tighter than expected - the unemployment rate averaged 4¼% in Q4, defying the RBA's November forecast to rise to 4.4%.   

On Friday (0930 AEDT), Governor Bullock and other RBA officials are set to appear for a parliamentary testimony hearing. The next RBA monetary policy meeting is scheduled for 16-17 March. 

Australian dwelling approvals unwind in December

Australian dwelling approvals fell more than expected in December (-14.9%) after rising sharply in November (13.1%), with volatile unit approvals (-31.6%) driving the swing. House approvals remained broadly flat (0.3%). Approvals lifted to almost 50k in the final quarter of 2025 - their highest quarterly total in 4 years - but were still well below the peaks of earlier cycles. Three rate cuts supported dwelling approvals in 2025, but if the RBA starts to reverse course as early as at today's meeting with a 25bps hike, approvals would likely be under pressure again - though on the other hand, housing prices continue to rise reflecting the tight demand-supply balance.  

Dwelling approvals were down 14.9% in December - far exceeding the expected decline of 6.4% - in another volatile result from this series. This followed a 13.1% surge in November after a 4.9% fall in October. Across the final 3 months of 2025, approvals came in at 49.9k - their highest quarterly total in 4 years after rising by 3.6% on the September quarter (48.2k). Unit approvals defied month-to-month volatility to rise by 7% in the December quarter (21.2k) to be around their highest levels seen since 2018. Quarterly house approvals lifted by 1.2% to 28.7k.  

The value of residential alteration work approved was down 1.4% in December ($1.2bn) but rose by 2.2% across the final quarter of the year. According to the September quarter national accounts, the volume of alteration work completed had risen by more than 7% through the year, indicating that demand has been the main component - rather than inflation - driving approvals.  

Preview: RBA February meeting

The RBA's Monetary Policy Board looks set to deliver a 25bps rate hike at today's meeting (decision due 1430 AEDT). This would lift the cash rate to 3.85%, reversing one of the three rate cuts delivered in 2025. The Board came into the year having effectively signalled the end of the easing cycle at the previous meeting in December, highlighting upside risks to inflation and uncertainty over the restrictiveness of policy settings. Recent data have reinforced that caution: inflation has moved further away from the 2-3% target band, while domestic growth and the labour market have surprised to the upside. This has led to a hawkish repricing of the RBA rates outlook, with two rate hikes now priced in this year - including a 70% chance of a hike today - compared to expectations for one further rate cut as recently as November.       

Last week's December quarter inflation report strengthened expectations for a rate hike today. While quarterly inflation slowed after surging in the September quarter - which the RBA largely attributed to temporary price rises - annual inflation continued to drift away from the midpoint of the 2-3% target band. Headline CPI moved up from 3.2% to 3.6% year-on-year, while the core or trimmed mean rate lifted from 3% to 3.4% year-on-year, with both measures exceeding the RBA's November forecasts (headline CPI 3.3% and trimmed mean 3.2%). For today's decision, the key issue is not the inflation overshoot by itself but rather what it implies about economic conditions more broadly. 

If the Board hikes today, its messaging is likely to emphasize that demand conditions have strengthened relative to the economy's supply capacity, putting upward pressure on inflation. Household spending and business investment lifted GDP growth to 2.1% year-on-year in the September quarter - already slightly above the RBA's year-end forecast for 2%, a pace it estimates to be around Australia's potential growth rate. Meanwhile, labour market conditions have remained tighter than the RBA was expecting. The unemployment rate averaged 4.2% over the final quarter of 2025 - defying the RBA's forecast to rise to 4.4%. 

Alongside today's decision, the RBA will publish new forecasts in the Statement on Monetary Policy - a key input for markets in assessing the rates outlook. The data (as discussed) indicates the RBA is likely to raise its inflation forecasts, while nudging up its outlook for growth and lowering its projection for the unemployment rate. But the forecasts will also take into account much more hawkish assumptions from higher interest rates and a stronger Australian dollar than compared to the November forecasts - factors that will weigh on the outlook for growth and inflation. That could set a high bar for a further hawkish repricing following the decision, unless Governor Bullock surprises at the post-meeting press conference. 

Macro (Re)view (30/1) | Volume gets louder

Markets were largely a headline-driven mess this week, with gold and silver at the epicentre of some volatile moves, surging to record highs before pulling back. Ongoing tariff (Greenland) and geopolitical tensions (Iran and Venezuela) and weak US dollar sentiment continued as key drivers. US equities were flat to soft following mixed earnings from 4 of the Magnificent 7 as Asia continued to outperform on AI-related gains. The USD index fell to 4-year lows, despite Fed Chair Powell signalling increased confidence in the outlook for the US economy as the FOMC left rates on hold (3.5-3.75%), while Q3 GDP growth was revised up to 1.1% quarter-on-quarter, its fastest in 2 years. Some stabilisation came from President Trump's nomination of Kevin Warsh to succeed Powell at the Fed when his term concludes in May. 

Warsh was regarded as an inflation hawk having previously served as a Fed governor (2006-2011), though recent statements indicate a preference towards lower interest rates, aligning with Trump's views. The confirmation of Warsh to the post is set to face some hurdles, notably from Senator Tillis who has vowed to oppose any nomination until the investigation into Chair Powell by the Department of Justice has run its course.  

The local AUD remains a key beneficiary of USD weakness, rising north of 0.70 to highs since early 2023. Support has also come from domestic factors after strong Q4 inflation data (see here) upped market odds for an RBA rate hike at next week's meeting to around 70%. Headline CPI rose 0.6% in the December quarter to 3.6% over the year (prior 3.2%) and the key trimmed mean or underlying measure was 0.9% in the quarter and 3.4% over the year (from 3%). Those outturns put inflation above the RBA's 2-3% target band and were higher than the central bank's forecasts.