Australian housing finance slows in Q1

Australian housing finance slowed in the March quarter, with falls seen in both lending commitments (-3.8%) and loan volumes (-6.2%), marking the weakest outcomes since late 2022. Sentiment was likely impacted by RBA rate hikes in February and March, while the first home buyer segment saw a pullback after surging in the prior quarter as the government expanded accessibility to its deposit guarantee scheme. Mostly pertinent to investors, changes to concessional tax arrangements coming out of the Federal Budget shape as another headwind.      

Lending commitments retraced from cycle highs with a 3.8% decline in the March quarter to $103bn, still up by more than 18% through the year. Both major segments weakened, with owner-occupier lending ($61.4bn) falling by 4.3%, while investors ($41.5bn) saw a 3% decline. In the owner-occupier segment, first home buyers took a step back from the previous quarter to see lending fall by 6.7%. Upgraders (-5%) also weakened. 

In terms of volumes, the total number of loans approved fell to just below 140k in the March quarter, a decline of 6.2%. At the peak post the pandemic, approvals were pressing 160k. A slightly larger contraction was seen in the owner-occupier segment (-6.9%) compared to investors (-5.3%).    

 

Australian Q1 Wage Price Index 0.8%; 3.4yr

Australian wages growth was 0.8% in the March quarter, with the annual pace easing slightly from 3.4% to 3.3%. These outcomes were broadly in line with expectations and RBA forecasts. There was little change in the pace of private sector wages growth, but the public sector saw a notable slowing after several new wage agreements went through in recent quarters.    

Wage inflation in the Australian labour market continues to track a solid pace. The headline Wage Price Index printed at 0.8% for the third quarter in succession in the March quarter. The major influence on quarterly wages growth came from enterprise agreements, largely linked to the public sector in Queensland (1.1%) as well as new policies in childhood education. 

Base effects saw annual growth ease from 3.4% to 3.3% but has seen little change for more than a year now. Underlying conditions in the labour market have loosened a little since the back half of last year but importantly remained consistent with being tight in the RBA's judgement. This has been a key factor behind the RBA's 3 rate hikes so far this year, which have sought to respond to inflation rising above target again. 

Private sector wages growth matched growth in the headline index at 0.8% in the quarter but was slightly softer in annual terms at 3.2%. Wages growth in the sector has slowed from a peak of 4.3% in the back half of 2023, though it has been broadly stable in the 3.3% area since late 2024. ABS analysis reported that the average pay rise in the private sector was 4% - but only 13% of jobs saw a wage change in the March quarter. 

Over in the public sector, wages growth has been more volatile in recent times than is typically the case, due to new wage agreements coming into effect. In the latest quarter, wages growth stepped down to 0.5% - its slowest outcome in two years. The annual pace slowed from 4% to 3.3%, a movement accentuated by base effects.  

In review: Australian Federal Budget 2026/27

Despite the headwinds from the Middle East conflict and rising inflation, Australia's fiscal outlook has improved somewhat. Surging energy and commodity prices are a net positive for Australia, while a higher inflation and nominal growth backdrop also boost tax revenue for the government. Policy changes are also part of the picture. Measures to curb spending in the nation's disability insurance scheme make, by far, the largest contribution to reducing deficits; however, changes that make long-standing tax concessions less favourable to investors have taken the limelight in post-budget coverage. 

The budget deficit in the current financial year (2025/26) is now on track to come in at $28.3bn or around 1% of GDP. That is an improvement from the $36.8bn deficit forecast back in the December update. Deficits through to 2029/30 (the forecast period covered by the budget) are expected to accumulate to $151bn all told, a $44bn reduction since the December update.  

As has been the case in recent years, a broadening set of measures have fallen under 'off-budget' spending, essentially regarded as investment expenditure. Including those measures, the headline budget deficit (yellow line in chart below) is $47.9bn in 2025/26 and around $265bn across the forward estimates.   

In the near-term, the economic outlook in terms of growth and the labour market is little changed - though inflation has been revised significantly higher to peak at 5%. That largely reflects the surge in global oil prices. The assumption for the Tapis oil price was raised to $100 per barrel from around $80 (in USD terms) forecast in December. Meanwhile, prices for key commodities (iron ore and coal) are likely to surprise typically conservative forecasts to the upside. 

With the conflict driving higher energy and commodity prices, the terms of trade is now expected to rise by 4.5% this year, upgraded from a flat prior forecast. This boosts nominal GDP growth (6.75%) and will ultimately be a windfall to the government. Forecast company tax revenue has been raised by $10.5bn over this financial year and next.  

However, with global growth slowing in 2026, these headwinds, as well as higher interest rates, will weigh on the domestic economy. Growth in 2026/27 was revised down by 0.5ppt to 1.75%. Those factors contribute to the forecast for inflation to cool rapidly, returning to the midpoint of the RBA target band.   

The changes to the economic forecasts have boosted the fiscal outlook by around $37bn through the forward estimates. Policy decisions taken by the government add another $8bn over the period. Thos factors are behind the reduction in forecast deficits.    

Regarding new policy, much of the limelight is around the changes announced to tax concessions on investments. From July 1 2027, negative gearing will apply only to newly constructed homes, while the government will remove the 50% discount that applies for capital gains tax, winding back the clock to 1999 where real gains on assets sold was taxed, attracting a minimum rate of 30%. These changes are forecast to net the government $3.5bn. Changes made to the NDIS are a far larger influence, expected to save the government almost $38bn - though over the next couple of years those savings will be outweighed by spending.   

Overall, the policy and economic parameter changes stabilise government spending at 26.8% of GDP before declining over 2028/29 and 2029/30. But that will remain higher than government revenue, reflecting the structural pressures on the budget, still including the NDIS and other major areas such as aged care, child care, debt interest and defence spending. 

Government net debt remains on a rising trajectory, forecast to lift from 18.8% of GDP in 2025/26 to 21.9% by 2029/30. Interest payments will lift to just below 1% of GDP over the coming years. The AOFM's issuance notice following the Budget has been estimated at $125bn in 2026/27, up from expected issuance of $120bn in 2025/26.  

Macro (Re)View (8/5) | Optimism continues

Market sentiment supported risk assets this week, with optimism towards a de-escalation in the Middle East remaining the central expectation. Front month crude oil futures fell by more than 7% on the week to below US$95, helping drive equity markets to broad-based gains and a bid into bonds reflecting reduced inflation risks. Higher beta currencies (EUR, GBP and AUD) were supported amid that backdrop. In central bank news, the RBA was joined by Norway's Norges Bank in hiking rates this week.  

The RBA delivered its third consecutive 25bps rate hike this week, raising the cash rate to 4.35%. Markets price in at least on further hike for the cycle, though the stage has been set for a near-term pause. At the post-meeting press conference, Governor Bullock described the cash rate as 'a bit restrictive', now at a level that addresses inflation risks while also giving the Board time to assess developments in the Middle East and in the Australian economy. 

Under current futures pricing for brent crude oil, the RBA raised its forecasts for inflation to peak later this year at 4.8% in headline terms and 3.8% on a core basis. But using a much higher path for the cash rate than was assumed by markets in February, the growth outlook has slowed materially this year (1.3%) and next (1.4%). For a full review of the meeting please see my note here. On the Australian data front, household spending in March was boosted by the fuel price surge (see here); the trade balance swing into deficit for the first time since 2017 (see here); and dwelling approvals retraced (see here). 

US nonfarm payrolls beat expectations for the second time in as many months, up 115k in April against the 65k consensus. Backward revisions were a net negative but only deducted a modest 16k from payrolls over February and March. With employment picking up and labour force participation declining slightly to 61.8%, the unemployment rate remained at 4.3%. Meanwhile, average hourly earnings growth firmed from 3.5% to 3.6%yr. Overall, this was a solid update on the US labour market that has remained more resilient than widely expected - including the Fed. Amid the uncertainty around the Middle East, markets have the Fed remaining on hold through year-end. 

Local elections in the UK have so far not been a market event, with counting to take some time and the early results largely as expected seeing heavy losses for the incumbent government. More volatility in GBP exposures could be seen next week if the results continue to increase pressure on PM Starmer. In the euro area, the unemployment rate fell from 6.3% in February to 6.2% in March, returning to cycle lows. However, the Middle East conflict and trade uncertainty remain headwinds to the labour market outlook - though the ECB appears on track to hike rates in June. 

Australia posts first trade deficit since 2017 in March

Australia posted its first monthly trade deficit since 2017 in March (-$1.8bn), with imports surging due to the tech-related capex boom and the Middle East fuel crisis. Imports accelerated at their fastest pace in more than 4 years (14.1%), while exports fell by nearly 3%.   

The monthly trade balance swung from a surplus of $5bn in February to a deficit of $1.8bn in March. That was the largest deficit since June 2016, and the first deficit at all since December 2017. Import spending surged by 14.1% in March to $45.8bn, overtaking exports that fell by 2.7% to $43.9bn. Across the first quarter of the year, imports lifted by 2.5% and exports declined by 1.2%. Given the quarterly movements in trade prices (imports 0.1% and exports 0.5%), net exports are shaping up as sizeable drag on Q1 GDP growth - though note that the monthly trade figures provide no visibility on services trade.  

Monthly imports (14.1%) posted their fastest rise since February 2022. The tech-related capex boom in data centres saw ADP equipment soar by 204%, driving the capital goods category to 36.8% increase in March ($12.7bn). Intermediate goods were the other notable movement, lifting by 8.5% to $18bn on the back of the acceleration in oil prices following the Middle East conflict. Fuel imports alone rose by 53.6% to $6.1bn, their highest level since late 2023.

Export revenue declined by 2.7% in March, reversing the gain in February (4.2%) to fall back to $43.9bn. Rural goods were the major driver, retracing by almost 12% with weakness broadly based across meat, cereal and wool exports. Non-monetary gold (-6.1%) cooled, but the value of these exports was still up around 42% on 12 months ago, reflecting the strength of the safe-haven bid in the commodity. Exports of non-rural goods (includes the major resources) were broadly flat in March (0.3%) but fell by 5.6% across the quarter. This came on the back of declines in iron ore (green line in chart below) -8.1%, coal (grey line) -4.4%, and other mineral fuels (mainly LNG) (pink line) -1.6%. By contrast, non-monetary gold (yellow line) climbed 23.7%. 

RBA hikes cash rate to 4.35%

The RBA delivered its third consecutive rate hike today, lifting the cash rate by 25bps to 4.35%. An 8-1 (hike-hold) vote from the Monetary Policy Board made this a notably more decisive outcome than the 5-4 split in March. With all three of the rate cuts from 2025 now reversed, Governor Bullock said the cash rate was now 'a bit restrictive', while her remarks at the press conference placed greater weight on the downside risks to growth and the labour market than at any stage in this tightening cycle. The RBA's latest forecasts in the Statement on Monetary Policy deteriorated in response to the recent energy price shock from the Middle East conflict. Inflation is now expected to peak higher later this year (4.8% headline and 3.8% core), while tighter monetary policy has lowered the growth outlook. Markets now expect the RBA to pause but still price in at least one further hike by year-end.  

Today's statement noted the Board's decision to hike reflected the assessment that inflation was likely to remain above target for some time, while there were upside risks to inflation expectations. Inflation has risen markedly since the middle of last year to be above the 2-3% target band. The Board's view is that this largely reflects excess demand, which it has sought to cool by hiking the cash rate three times this year. The complication is that surging energy prices are delivering a new inflationary impulse. 

Although it is only early days, the RBA has seen enough indications that energy price shock is likely to spill over into inflation more broadly, so called second round effects. At the press conference, Governor Bullock said that businesses looking to pass-through higher energy prices was reasonable. Her key concern was that if demand was to remain robust, they might be emboldened to push through even larger price rises that could then establish a new norm. 

The Statement on Monetary Policy included the RBA's updated view on the outlook in light of the energy price shock. Headline inflation was now expected to peak at 4.8% in headline terms in the June quarter (up from 4.2%), and core inflation was seen rising to 3.8% (up from 3.7%). That largely reflects the impact of higher oil prices, marked up to just above US$100/bbl from the low $60s in the February forecasts. With the RBA using the market curve for interest rates, the assumption for the cash rate in the latest forecasts was 50bps higher than in February. As a result, the growth outlook this year was cut from 1.8% to 1.3% and then to 1.4% in 2027 from 1.6% previously. Below trend growth puts upward pressure on the unemployment rate through the enxt couple of years. 

The key difference at today's press conference was that Governor Bullock said the Board was attentive to risks on both side of its forecasts. In February and March, it was almost exclusively concerned about upside risks to inflation. But with rates having been hiked three times now, more focus has shifted to downside risks to growth and the labour market. That shift was interpreted by markets as indicating a pause from the RBA is now likely, allowing itself time to assess the situation. The next monetary policy meeting is on 15-16 June.   

Australian household spending rises 1.6% in March

Surging fuel prices drove Australian household spending to its fastest rise in over two years, increasing by 1.6% in March. Spending in the transport category (including fuel) accelerated by more than 5%, its sharpest rise since the last major conflict in the Ukraine caused global energy prices to soar in early 2022. Fuel prices went up by 33% in March, which the ABS estimates led to a 1.3% fall in the volume of fuel purchased, while spending on public transport increased.          

Household spending rose by 1.6% in March, its fastest month-on-month increase since January 2024. Annual growth lifted from 4.7% to 6.3%, a 2½-year high. These figures are based on nominal spending; thus they reflect the impact of the 33% rise in fuel prices in response to the closure of the Strait of Hormuz. 

With fuel prices surging and public transport usage rising, transport spending rose by 5.1% in the month. From April 1, the Federal Government temporarily lowered the fuel excise tax, contributing to lower prices for consumers. However, higher costs for airfares and other forms of travel will flow through. 

There were no clear-cut signs that higher fuel prices were causing demand - though it is still early days. Non-discretionary spending rose by 0.6% in March. Hotels, cafes and restaurants saw some weakness (-0.9%), but other discretionary-related categories rose, such as recreation and culture (1.3%) and household furnishings and equipment (1.6%) - the latter rebounding from recent declines. Fuel caused non-discretionary spending to accelerate by 3.4% in the month, its fastest rise since the stockpiling efforts during the pandemic.  

Volume estimates for the March quarter reported a 0.7% increase in real household spending, marginally softer than the 1% rise in the previous quarter. Annual growth firmed from 2.5% to 2.8%, a solid pace at highs since the June quarter 2023.  

Several categories saw quarterly volumes increase, including food (0.8%), health (1.5%), transport (1.7%), recreation and culture (1.1%) and other goods and services (1.1%). Declines were recorded across alcohol and tobacco (-2.4%), clothing and footwear (-1%), furnishings and household equipment (-0.7%) and hotels, cafes and restaurants (-0.1%). 

Preview: RBA May meeting

The RBA is widely expected to lift the cash rate to 4.35% with another 25bps hike today. The key rate has already risen by 50bps this year. The hike in February was a unanimous decision (9-0), but the March hike was a line-ball call, with four members shifting their vote to a hold amid the uncertainty caused by the Middle East conflict. While another split vote seems likely, markets are pricing in a high probability (around 75%) of a hike today, and a further increase by year-end. The RBA stands very clearly as the hawkish outlier among its peers. While the Fed, ECB and BoE remain in wait-and-see mode, the RBA views the recent oil price shock as an additional upside risk to already elevated domestic inflationary pressures, largely attributed to excess demand in the economy.    

 

Given the 5-4 vote split in March, Governor Bullock was left with the task of communicating a united message. Her overarching point was that all members were on board with the direction rates were heading, the only sticking point between the hike and hold blocs was the timing. Key judgements on the economy informed by the incoming data were that capacity pressures and labour market tightness had increased. The meeting minutes later confirmed that higher fuel prices were viewed as more of a risk to inflation rather than growth. 

For an RBA intent on hiking, developments in the weeks since the March meeting have likely only reinforced its views. While oil prices remain elevated with the Strait of Hormuz closed, the Federal Government's temporary cut to the excise tax from April 1 has contributed to noticeably lower fuel prices at the pump - a support for household spending. Inflation has drifted further above the 2-3% target band, rising from 3.7% to 4.6%yr on a headline basis in March. The trimmed mean - the measure the RBA regards as a better gauge of price pressures - was 0.8% in the March quarter and 3.5% in annual terms. Meanwhile, the labour market continued to perform well with the unemployment rate holding at 4.3% in March, in line with the RBA's forecasts. 

Aside from the decision, the key issue is around where the RBA sees policy moving forward. Markets broadly expect a hike today but also sense another hike may come before the tightening cycle pauses. Any signs that either support or counter that assessment will be key. Governor Bullock usually steers clear of providing any guidance at press conferences, so the RBA's updated economic and inflation forecasts in the Statement on Monetary Policy may be left to do the talking.  

The previous forecasts from February are long out of date, factoring in a pre-conflict crude oil price in the low US$60s, compared to current levels well above $100. The outlook for headline inflation will rise to account for that from the current forecasts of 3.2% by year-end and 2.7% in 2027. But as a guide for policy, markets will be looking at how that spills over to the trimmed mean inflation forecasts (3.2% in 2026 and 2.7% in 2027), and then to the growth outlook. The RBA had growth slowing to 1.8% this year and 1.6% next year; however, demand destruction from higher inflation and tighter monetary policy risks an even weaker growth trajectory. 

Australian dwelling approvals decline in March

Australian dwelling approvals fell by more than 10% in March, broadly in line with consensus - though house approvals climbed to their highest level since the end of 2021. Volatility in higher density approvals continues to dominate this data series, posting a 23.4% drop in March. In February, a surge in higher-density approvals (93.4%), likely delayed during the holiday months, came through (93.4%) to drive headline approvals to a 31% rise. RBA monetary policy has turned from a tailwind for housing construction in 2025 into a headwind in 2026. Rates have already risen by 50bps this year and are likely to go up by a further 25bps at tomorrow's meeting. 

Dwelling approvals fell by 10.5% in March (-10% expected) to 17.3k, though they rose by 9% over the past 12 months. The result was driven by a 23.4% decline in higher density approvals to 7k, reversing from a large inflow of approvals in February (31%). By contrast, house approvals rose for the 5th month in a row (0.9%) to reach 10.3k, their highest level since December 2021. 

More than 51k dwellings were approved across the first quarter of the year, a gain of 2.1% on the December quarter and 28.2% above the cycle low from the March quarter of 2023. House approvals have gradually worked their way up over the past couple of years. Despite capacity pressures in the sector, the dynamics for housing construction were broadly positive: demand for stock was stock strong due to population growth, house prices were rising, and the RBA eventually started cutting rates in 2025. 

Even in the first quarter of the year when the RBA was hiking, house approvals still rose by 5.1% to 30.6k. But the cycle is clearly at risk of turning when the lagged effects of monetary tightening take hold, which are likely to weigh on housing construction, a typically interest-sensitive sector. Higher-density approvals were down 2% in the quarter to 20.8k.        

Residential alterations - measured as the value of work approved - rose sharply through the past 12 months (15%). There are inflationary effects embedded in that increase; however, the combination of earlier rate hikes, rising housing prices and a tight overall balance between housing demand and supply have likely also been at play.