Australian housing finance plunges in Q3

The downturn in the Australian housing market accelerated in the September quarter with the effects of higher interest rates and recent tax changes continuing to gain traction. Heavy declines in both lending (-15.5%) and loan approvals (-15%) in the latest quarter broadened their falls to around 25% since the end of 2025. Cotality recently reported that capital city housing prices nationally have fallen by about 8% after peaking earlier this year.  

RBA rate hikes and tax changes in this year's federal budget are having profound effects on the Australian housing market. In the September quarter, the value of lending declined by 15.5% - their third straight decline - to $81.2bn, a low since the March quarter in 2024. 

Investors - the segment targeted by the tax changes to negative gearing and capital gains - are retreating at pace. Lending to investors declined by 32.3% in the quarter to $24.7bn. That takes the cumulative decline to 43% from record highs at the end of 2025. Lending to investors to purchase existing stock has more than halved over this period. The one pocket of the investor market that is faring better is purchases of newly finished stock (1.1%q/q). These investors under the new arrangements are still able to access negative gearing and have a choice over the methodology for how capital gains are assessed from a tax point of view.  

The owner-occupier segment also saw lending contract, but by a comparatively milder 5.3%q/q to $56.5bn, now down 13.2% from 2025's cycle high. Declining housing prices have played a role in lending rolling over, though that itself is more broadly reflective of weakening demand.        

Total loan approvals were down 15% in the September quarter coming in at 111.9k. That was their lowest level in 3 years, having fallen by almost 26% since the end of 2025. Loan volumes slumped to the investor segment by 30.6%q/q to 35.3k, nearly halving from their peak in 2025 and at levels last seen during the pandemic in 2020. For owner-occupiers, loan volumes were down 5.3%q/q to 76.6k, a 3-year low.  

While the policy backdrop has seen investor activity in particular slow sharply - largely the intent of the tax changes to support first home buyers to enter the market - first home buyer activity has also weakened because that segment is also impacted by higher rates. Lending to first home buyers (as owner-occupiers) was down 8% in the latest quarter, while loan volumes were off by 8.6%. 

Macro (Re)View (6/11) | Midterms shift narrative

A shift in the US political landscape with the Democrats taking control of the Congress after the midterm elections had widespread ramifications across markets. Concerns over the pace of the data centre buildout weighed on equities, but renewed optimism around an end to the Gulf conflict saw brent crude oil fall almost 14% over the week. That supported lower Treasury yields, even though strong payrolls data on Friday revamped hawkish pricing for a Fed rate hike in December to around an 80% chance from around 50%. The USD rose modestly. The overall backdrop saw the AUD fall heavily, which also reflected revised expectations that the RBA's tightening cycle has reached the end of the line after this week's hike. 

US nonfarm payrolls surged by 165k in October - more than double the 70k consensus - lowering the unemployment rate from 4.2% to 4.1%. Backward revisions also boosted employment gains over August and September by 84k, accelerating the 3-month average for payrolls to a very strong 137k. 

The report showed employment growth in professional services (70k) and healthcare (42k) in October was well above their respective averages for the past 12 months. A much stronger-than-expected rise in job openings in September (7.5m) provided a supporting sign of the strength in labour demand. Average hourly earnings growth lifted from 3% to 3.1%yr; however, a rise in participation (61.9%), as well as continued strength in labour productivity (2.1%Y/Y in Q3), should keep any potential concerns from the Fed about wage pressures contained.   

The Bank of England hiked interest rates for the first time in more than 3 years, raising its key rate from 3.75% to 4%. While the decision was expected, support for hiking from all 9 members on the MPC - the vote was 8-1 with Cathrine Mann voting for a 50bps hike - came as a hawkish surprise. The more dovish members (Dhingra and Taylor) that were expected to remain resistant to hiking saw the move as an insurance hike in light of increased inflationary risks. 

In its latest Monetary Policy Report, the BoE materially lifted its inflation outlook due to energy prices rising more than previously anticipated. The BoE now sees headline inflation peaking close to 5% around the middle of next year, up an expectation of just 3.2% in late 2026 in the previous forecasts. At the post-meeting press conference, Governor Bailey said that while a prolonged tightening cycle was not warranted, unless inflationary pressures eased - essentially requiring the Gulf conflict to end - additional tightening was likely. Markets are pricing in a further 3 rate hikes over the next 12 months or so. 

In Australia, another 25bps rate hike from the RBA - its 5th this year - increased the cash rate to 4.85%. As discussed in my review of the meeting (see here), the RBA has once again had to raise its inflation outlook in its Statement on Monetary Policy, pushing out the timeline for inflation to return to target (2-3%) until mid 2028. A key message from Governor Bullock at the post-meeting press conference was that capacity pressures in the economy due to the strength of domestic demand are now judged to be more pressing than previously thought. 

The sense in markets is that the RBA will now go on pause as it waits for signs in the data to assess how its tightening cycle is impacting conditions. Cash rate futures attach a low probability (sub 30%) to any further hikes, and by the close on Friday the curve was close to fully pricing in a rate cut by the end of 2027. Domestic data reflected resilient demand, with an upside surprise for household spending in September (see here). Dwelling approvals advanced 5.1% (see here) and the trade surplus widened in September (see here), both beating expectations. 

Australia's trade surplus $2.8bn in September

Australia's trade surplus lifted modestly from $2.6bn to $2.8bn in September, its widest in 7 months, defying expectations to narrow to $1bn. Exports rose 2.3% in the month on the back of strength in the commodities complex, reaching their highest level since March 2023. That contrasted with a 3.3% fall in imports - their 3rd decline in the past 4 months - with the renewed pressures on global oil prices yet to impact fuel imports.    

 

The monthly trade account was in surplus by $2.8bn in September, with exports ($48.4bn) exceeding imports ($45.6bn). It averaged a surplus of $1.5bn over the past 3 months, while it was in surplus by $4.5bn over the quarter. Australia has seen its trade surpluses compress notably this year, and was in fact in deficit in March and May for the first time in around a decade. The AI-related investment boom has seen imports surge, while higher fuel prices due to the conflict in the Gulf have also played a role. However, exports hit back in the latest quarter to some degree rising by 2.6% to $141.7bn, outpacing a broadly flat result (0.2%) for imports ($137.2bn).  

In September, exports lifted by 3.3% to $48.4bn (10.4%yr). The key driver was non-rural goods (2.8%) as most of the major commodities (excluding coal -3.5%) saw gains: LNG 6.6%, metals 23.5%, and iron ore 2.3%. The chart below shows quarterly commodity exports, with LNG, or 'other mineral fuels' (pink line), ramping sharply of late on the back of the rise in global energy prices caused by the Gulf conflict. A 3.6%m/m rise in rural goods, driven by meat (11.3%), also supported the lift in exports.   

Monthly imports fell by 3.3% to $45.6bn but are still up by almost 12% since September last year. Aside from a large decline in volatile non-monetary gold (-34.7%), the overall weakness reflected falls in consumption (-2.2%) and capital goods (-2.5%). Car imports (-4%) weighed most on consumption goods, while capital goods - the category that has been boosted by the AI-related upswing - declined as aircraft orders pulled back (-33.7%) after recent gains. Intermediate goods were up modestly (0.9%) but are set to rise much more sharply on the back of the renewed rise in global oil prices, as they did earlier in the year after the conflict escalated. 

Australian household spending rises in September

Australian household spending rose by a stronger-than-expected 0.6% in September, rebounding from a weak month in August (-0.1%). Higher fuel prices boosted spending, while travel and leisure spending was also strong alongside the AFL and NRL finals series. Sales volumes increased at a solid pace (0.7%) over the quarter, reflecting the resilience of household demand; however, the RBA has effectively hiked rates twice since then, with its September hike coming on the final day of the month, followed by yesterday's rate rise (see here).  

Household spending increased by 0.6% month-on-month in September - well above the 0.2% rise that was expected - and 6.8% over the year. A downward revision adjusted the result in August from flat (0%) to a modest fall (-0.1%), after spending rose sharply in July (1%). 

Gains in the health (1.5%) and recreation and culture categories (0.8%) were the key factors behind the rebound in September. Health spending was supported by increased consultations as the flu season came late on. The AFL and NRL finals through September boosted spending on travel, gambling and electronic goods. Strong ticket sales for upcoming concerts were also a factor. 

Meanwhile, spending on fuel rose 5.4% in September as fuel prices reaccelerated due to the conflict in the Gulf continuing and with the fuel excise tax cut having ended in August. 

For the September quarter, volumes (or spending adjusted for inflation) increased by 0.7%, following similar sized gains in recent quarters. Volume growth increased from 2.5% to 3.2% year-on-year, its fastest pace since early 2023.  

Volume gains were broadly based in the September quarter, with transport (1.6%) and clothing and footwear (1.2%) leading the way. Hotels, cafes and restaurants fell very slightly (-0.1%), while alcohol and tobacco (-1.2%) continued to contract - though that is affected by underreporting due to the well documented rise in illicit tobacco sales.     

At yesterday's meeting, the RBA made a modest downgrade to its outlook for household consumption growth this year from 1.6% from 1.4%Y/Y. Risks are weighted heavily to the downside given the lagged effects from the RBA's 5 rate rises have yet to play through, while the housing market downturn is also showing no signs of slowing. 

RBA hikes cash rate by 25bps in November

The RBA hiked the cash rate by 25bps to 4.85% at today's meeting, the 5th time it has raised the key rate this year. Once again, the RBA lifted its inflation forecasts in the Statement on Monetary Policy, pushing back the expected return of inflation to the 2-3% target band from early to mid 2028. The major surprises were the 6-3 vote split from the Board and policy guidance that was watered down by removing the reference to 'increasing the cash rate target further'. The market reaction to those developments was notable. Pricing for another hike this cycle fell from around a 40% chance to 20%, the 3-year government bond yield declined 8bps to close at a 2-month low (4.77%), and the Australian dollar weakened.       

The themes that accompanied today's hike were consistent with the RBA's hawkish messaging going into the meeting around upside risks to inflation coming to fruition. Persistent conflict in the Gulf had kept oil prices elevated, with signs that was now spilling over to a broader range of prices. In addition, Governor Bullock at the post meeting press conference highlighted that capacity pressures in the domestic economy had been more significant than previously thought. 

The inflation outlook this year was lifted materially from 3.6% to 4.5% on a headline basis and from 3.3% to 3.6% in underlying terms. Both headline and underlying inflation is then expected to slow over 2027 to 2.7% and 2.9% respectively (both revised up from 2.6%), before eventually returning to the middle of the 2-3% target band in mid 2028, around 6 months later than previously forecast.   

Interest rates were already seen as restrictive ahead of today's meeting and this latest hike has made financial conditions a little tighter. The effect of restrictive policy is set to weigh on the growth outlook, which is expected to run at a below trend pace across the forecast horizon. Growth this year is now expected to be 1.6%, a little stronger than previously expected (1.4%); however, downward revisions were made to forecast growth in 2027 (1.3% from 1.6%) and 2028 (1.5% from 1.8%). 

As a result, the unemployment rate is now expected to rise more quickly and to reach a higher peak of 5.1% in 2028. If there are signs that this outlook for slower growth and a softer labour market is beginning to play out, markets will look to start pricing in rate cuts; however, they are not yet at that point. The next RBA meeting is on 7-8 December.

Preview: RBA November meeting

The RBA is widely expected to hike the cash rate by 25bps to 4.85% today (decision due at 1430). Hawkish RBA commentary and Q3's inflation report have combined to lift market pricing for a hike at this meeting to around an 80% chance, up from around 50% after the September meeting. Although the RBA has already hiked rates four times this year - a far more aggressive stance than the likes of the Fed and ECB - it is not yet ready to throw in the towel on its tightening cycle. The effects of the Gulf conflict and a robust domestic economy will see the RBA revise its inflation outlook up today, threatening a more prolonged return of inflation to the middle of the 2-3% target band, currently not forecast until early 2028.  

At the September meeting, the Monetary Policy Board returned a unanimous vote (9-0) to raise the cash rate by 25bps to 4.6%. The meeting minutes showed there was rising concern that elevated inflation could persist, with the conflict in the Gulf continuing to put upward pressure on energy prices and with robust demand testing the supply capacity of the domestic economy. In Q3, headline CPI was running at 3.9% year-on-year while the underlying or trimmed mean rate was 3.7% year-on-year (quarterly series). Those outcomes exceeded the RBA's year-end forecasts for 3.6% and 3.3% respectively, suggesting that its concerns over the inflation outlook may be materialising.  

While the labour market has shown some signs of faltering - the unemployment rate averaged 4.6% in Q3, a little higher than the trajectory forecast by the RBA - conditions are still broadly viewed as tight. However, it was formally noted in the meeting minutes that with inflation remaining elevated, the trade-off with the employment side of its mandate was worsening. This will be a key message for Governor Bullock to manage at today's press conference. As will the slowdown in the housing market amid another rate rise.     

Australian dwelling approvals rise 5.1% in September

Australian dwelling approvals outperformed expectations rising by 5.1% in September, well above the 2% rise forecast. However, the result was driven entirely by a surge in higher-density approvals (24.6%), hiding a large fall in house approvals (-5.3%). Approvals have trended higher over the past 2-3 years but could now be peaking given the prevailing headwinds to housing construction. 

Dwelling approvals rose 5.1% in September to 17.9k, their largest gain since June. However, that followed back-to-back falls in July (-1.7%) and August (-5.2%), leaving approvals flat over the quarter (53.1k). An influx of unit approvals (24.6%), which are volatile, drove the headline gain in September after high-rise approvals in Sydney and Brisbane surged. The underlying data showed high-rise approvals turned in their second strongest result in the past four years. Despite this, unit approvals still declined in the quarter (-1%). House or detached approvals fell 5.3% in September, their weakest result in more than a year, though they managed to scratch out a gain in Q3 (0.7%).  

Given the 4 interest rate rises already delivered by the RBA this year, and a 5th expected tomorrow, this could well be the top for approvals in this cycle. Other headwinds are also a factor. Cotality this morning reported that national housing prices continued to slide in October, bringing the correction to almost 7%. Last week, the ABS highlighted that soft demand is seeing developers increase incentives, while cost increases are also putting pressures on margins. 

Macro (Re)View (30/10) | Fed and ECB on hold; RBA to hike

Despite a strong start, US equities ended up lower this week, with the reversal sparked by the same concerns around the returns from massive AI-related investment that have gripped the market for months. The USD rose modestly (0.2%) and the Treasury curve was a little steeper. In a raft of central bank meetings, the Fed, ECB, BoJ, and, in a surprise decision, the RBNZ all left rates unchanged. The BoC hiked by 25bps, and the RBA is expected to follow suit next week.  

In the US, the Fed left rates unchanged in the 3.75-4% range. While the decision was expected and supported by a large majority of FOMC voters (10-2), broader uncertainty over the Fed's reaction function persists. In every sense, the Fed's messaging is hawkish given inflation remains 'elevated' to its 2% target - data this week showed its preferred core PCE deflator was running at 3.1%yr in September - but the statement said the FOMC opted to wait for 'the accumulation of more information' rather than hiking this week. 

This was despite its assessment of economic activity being upgraded from 'solid' to 'strong' as GDP growth accelerated in Q3 by 0.8%q/q and 2.1%Y/Y on the back of surging AI-related spending and resilient household demand. Chair Warsh provided little insight at the post-meeting press conference, emphasising the tightening in conditions following the September rate hike as evidence of its commitment to the inflation target. Warsh also announced a change to the policy schedule from next year. A vote on rates will be removed from one of the 8 meetings in 2027 (and then two in 2028) to allow the FOMC to focus entirely on strategy deliberations.  

The ECB left its key rates on hold this week. Growth in the euro area remains resilient, GDP in the September quarter rose by a stronger-than-expected 0.4%q/q and 1.3%Y/Y, though the ECB said that downside risks remain. But upside risks to inflation remain the more prominent concern, with post-meeting reporting quoting ECB sources indicating that a rate hike in December is likely. News of President Lagarde's early departure from the ECB in February, nine months before the end of her tenure, overshadowed the press conference. From a market perspective, the largest impact from the UK autumn budget played out in equities after increases in taxes on banks were smaller than expected.   

Pricing for an RBA rate hike next Tuesday rose from around 60% to above 80% this week on the back of hawkish RBA commentary and elevated inflation data for September. Whether it was chief economist Hunter's 60 Minutes appearance or the Senate testimony from the bank's top officials, the key message was that the inflation outlook had worsened recently, requiring more work to bring inflation back to the 2-3% target. Higher fuel and holiday travel costs were key drivers of headline CPI lifting by 1.3% in the September quarter and 3.9% over the year; however, a strong increase in the trimmed mean - the RBA's preferred measure - of 1% quarter-on-quarter and 3.7% year-on-year indicates that price pressures are broadly based (see here).