Australian housing finance surges in December

Australian housing finance commitments surged by a further 8.6% for the month in December, rising to a new record high level as the effects of Victoria's reopening and policy stimulus continued to come through. Evident was an acceleration in construction loans ahead of the tapering in the Federal government's HomeBuilder scheme at the turn of the year.  

Housing Finance — December | By the numbers

• Housing finance commitments ($ value, ex-refinancing) advanced for a 7th consecutive month with an 8.6% rise in December against the median estimate for a 4% lift, reaching a record high of $26.01bn (prior: 5.6%mth, 23.7%yr).  
• Owner-occupier commitments lifted by 8.7%m/m extending its record high to $19.94bn (38.9%yr) (prior: 5.5%mth, 31.4%yr).  
• Refinancing activity by owner-occupiers picked up in December (11.3%) after recent weakness to $6.93bn to be up by 8.1% over the year.  
• Investor commitments posted an 8.2% lift in December (prior: 6.0%) to $6.07bn, driving the annual pace up to 10.9% from 3.9%. 

Housing Finance — December  | The details 

Australian housing finance activity accelerated towards the end of the year driven by a catch up continuing to occur in Victoria—particularly from first home buyers—with the disruption of the shutdown out of the way and a rush to take advantage of the HomeBuilder scheme at its existing level ($25k) before the tapering of the grants (to $15k) from the start of 2021.

Over the final quarter of 2020, lending commitments made to owner-occupiers increased by 16.3% outpacing a 14.1% lift from the investor segment. Overall, housing finance commitments (excluding refinancing) lifted 15.8% in Q4 after a 20% rise in Q3. The year 2020 was a striking contrast between the first half where activity was suppressed by shutdowns and uncertainty before rebounding over the second half on reopenings and policy stimulus measures. Lending commitments surged by 22% over the second half compared to a 0.6% rise in the first half; owner-occupier lending soaring 26.5% in the 2nd half vs 3.4% in the 1st half and the investor segment swinging to a 9.4% rise from 6.6% contraction over the period. 

Notable in December was the lift in lending for new construction rising 17.1% to the owner-occupier segment. This was undoubtedly associated with borrowers looking to obtain approvals before the grants available under the HomeBuilder scheme reduced from $25k to $15k. This has been a very stimulatory policy (shown below), with construction lending to owner-occupiers soaring by 122% since June (the policy commenced on June 4). Note also that this would be boosted by the effect of additional state government incentives on offer in some states (WA and Tas) for first home buyers undertaking new builds.  

First home buyers have been a major beneficiary of the stimulus measures enacted and this is reflected by the surge in activity from the segment (see chart below). The value of commitments made to first home buyers accelerated by a further 14.1% in December (60.6%yr) while the number of approvals cleared by lenders jumped 9.3%m/m (56.6%yr). Again, this suggests, many first home buyers were looking to take full advantage of the HomeBuilder scheme before the end-of-year deadline.

In particular, there was very strong first home buyer demand coming through in Victoria (31.4%m/m) after a surge in November (23.5%) as well, but keep in mind that the segment in that state was halted by the second shutdown whereas in the other states the recovery was able to run without such a disruption. 

The other key aspects from the state data were owner-occupiers extending their strength in the month, except in South Australia.  

While in the investor segment, the upswing in activity is becoming more and more established with Western Australia (59.6%yr), Tasmania (45.2%yr), Queensland (26.9%yr) and New South Wales (15.9%yr) up sharply from a year earlier. 

Turning to the approvals numbers in the owner-segment, construction-related approvals led the way surging by 14.7% in the month (85.3%yr) with contracts having needed to be entered into before 1 January 2021 to be eligible for the full $25k HomeBuilder grant. Within this, construction loans were up 15.3% (121.7%yr) and loans to purchase newly constructed homes lifted 13.1% (25.5%yr). Approvals to purchase established homes lifted 4.0% for the month (18.2%yr). 

Housing Finance — December | Insights

The nation's housing market has built up very significant momentum over recent months, with conditions boosted by reopening effects combined with a range of policy stimulus measures. This was evident in this morning's data on house prices from CoreLogic with national capital city prices up for a 4th consecutive month lifting by 0.7% in January (1.7%yr), while regional centres advanced by 1.6% (7.9%yr). With house prices turning higher on the back of the stimulus measures, this will no doubt be a key area of discussion in the Q&A at tomorrow's speech by RBA Governor Philip Lowe and then at Friday's parliamentary testimony. 

Macro (Re)view (29/1) | Focusing on the fundamentals

Australian inflation was the main focus domestically this week with the headline consumer price index surprising to the upside of consensus coming at 0.9% in the December quarter against 0.7% anticipated, with the annual pace firming to 0.9% from 0.7% (reviewed here). Policy-related effects in response to the pandemic continue to be the main factor rather than a build-up of inflationary pressures generated by the economic recovery. Confirming this was another soft print on underlying inflation, with the RBA's preferred trimmed mean measure coming in at 0.42% in Q4, holding the annual pace to a record low of 1.19% for the second consecutive quarter.

Chart of the week 

The main contributors to headline CPI in Q4 were the ending of the Federal government's provision of free child care services and excise tax increases on tobacco, while more modest contributions came from domestic travel as state borders reopened and increases in private health insurance premiums came through after deferrals earlier in the year. Meanwhile, a state government rebate on electricity bills in Western Australia resulted in utilities weighing heavily on CPI, while the Federal government's HomeBuilder scheme and additional incentives in some states held back what would have been a much stronger lift in new dwelling costs. Outside of these factors, there were few signs that the strong momentum the economy has established since reopening was sparking the inflationary pulse. But that should not come as a surprise given the presence of elevated spare capacity that was highlighted in last week's labour force survey for December (more here) with the unemployment rate at 6.6%, notwithstanding the significant improvement has occurred since the peak of the pandemic crisis. 

With inflation continuing to run well below target and with labour market conditions still a long way from being repaired, the RBA is likely to reinforce the need for its accommodative policy settings to remain in place when the Board meets next Tuesday. With $50bn of purchases under the RBA's $100bn bond purchase program now completed, attention will be turning to what happens when the target is reached in early April. The RBA's calendar shows there will be no shortage of opportunities for the central bank to outline its thinking on the matter over the coming few weeks so Tuesday's meeting may provide few insights but given that the macro conditions will still be well short of the Board's stated focus on actual inflation and employment outcomes, an expansion of the bond purchase program shapes as the likely path. More generally, markets will be keen next week to gauge the Board's assessment on the economic recovery, which despite virus-related concerns emerging over the summer holiday period appears to be showing plenty of resilience.

The other highlight locally this week was the NAB's Business Survey for December that conveyed an upbeat tone with the conditions index advancing by 7 points to +14, making this its strongest reading since September 2018. This was driven by sharp improvements in trading conditions (+5pts to +20) and, more importantly, by employment (+13pts to +9) with surveyed firms indicating that hiring activity was robust. Going against this positivity was a pullback in confidence to +4 from +13, likely reflecting the effects of virus related-concerns in New South Wales, though that is likely to improve next month in line with the situation coming under control in early 2021. 

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Turning to events offshore and while the market narrative was heavily focused around the surge in several US stocks leading to the well-publicised squeezes of short positions held over those names, there were plenty of macro-related developments to digest. The IMF this week upgraded its projection for global GDP growth in 2021 to 5.5% from 5.2% previously, reflecting the potential for vaccines and a stronger fiscal impulse to lift activity later on in the year. The group's earlier expectation for output to contract by 4.4% in 2020 was also revised to a 3.5% decline. 

Growth in advanced economies is projected to rebound by 4.3% in 2021 after falling by an estimated 4.9% in 2020, with GDP returning to its pre-pandemic level by the end of this year. Driving the upgrade was a stronger profile for the recoveries in the US (5.1% in 2021 from 3.1%) and Japan (3.1% from 2.3%) on the back of additional fiscal support measures announced towards the end of last year. Incidentally, the IMF's outlook for Australia was revised higher to 3.5% in 2021 (from 3.0%) and 2.9% in 2022 (from 2.8%). Meanwhile, the effects of shutdowns in the UK and Europe are projected to weigh on their respective rebounds when those economies reopen. Forecast growth in the euro area for 2021 was cut by 1 percentage point to 4.2%, while the outlook for the UK slipped to 4.5% from 5.9%. Aside from uncertainties around new variants of the virus emerging potentially leading to the extension of containment measures, the IMF noted the key risks to its outlook were delays in vaccine roll-outs, social disunity, and policy support being withdrawn from economies too quickly. Also on the global stage was the World Economic Forum where the agenda focused on the need to reset policies to ensure greater inclusion, cohesiveness and sustainable practices as economies recover from the pandemic, though the events out of Davos gained little attention from the markets across the week.  

In the US, the highlight of the week was the Federal Reserve's policy meeting with the FOMC leaving its existing stance unchanged, as widely expected. The main message from FOMC Chair Jerome Powell in the post-meeting press conference was that while there were positives around the outlook due to the vaccine roll-out and large-scale fiscal stimulus, a tapering in the run rate of its asset purchases from the current pace of $120bn/mth was not on the horizon with "substantial further progress" towards its inflation and employment goals still required. Here, the emphasis is on actual outcomes materialising in the data flow rather than being forecast to emerge by the Fed. Speaking of the data flow, the first estimate of Q4 US GDP growth came through this week lifting by 1.0%q/q (-2.5%Y/Y) after Q3's rebound of 7.5%. This took GDP to within 2.5% of its pre-pandemic level after it was crunched by 10.1% over the first half of 2020. Growth in household consumption slowed back to 0.6% in Q4 after surging by 9.0% in the previous quarter on the reopening, with services (1.0%) outperforming goods consumption (-0.1%) in contrast to the trend that has occurred since the onset of the pandemic.

Sentiment in Europe was dented this week by ongoing delays in the vaccine roll-out there amid discord between the European Union and AstraZeneca over delivery targets. On macro developments, reflecting the impact of the return to broad-based shutdowns the EU's Economic Sentiment Indicator (ESI) remained weak after falling to a reading of 91.5 in January from 92.4 in the month prior. The ESI's sub-components showed deterioration in retail conditions and in the confidence levels of consumers and services industries. On the policy front, comments from ECB Governing Council member Klaas Knot made headlines by saying that there was still scope to cut rates further from the current -0.5% setting—an outcome widely thought to be an unlikely move by the markets, not least because the central bank has favoured asset purchases and liquidity facilities in its pandemic response. In a heavy week for European equities, banking stocks underperformed falling in the order of 5%.  

Australian Q4 CPI 0.9%; 0.9%yr

Australia's Consumer Price Index (CPI) was stronger than forecast in the December quarter at 0.9%, though this was more reflective of policy-related effects associated with the pandemic rather than underlying macro conditions. Annual CPI remains weak at 0.9% and the record low on the RBA's preferred trimmed mean measure of 1.19% held in Q4.       

Consumer Price Index — Q4 | By the numbers 

• Headline CPI (not seasonally adjusted) came in above the median estimate in the December quarter rising by 0.86% against 0.7% expected and after Q3's rebound of 1.57%. Seasonally adjusted CPI printed at 0.77%q/q and 0.86%Y/Y (prior: 1.4%q/q, 0.69%Y/Y).  
• Details for the underlying measures (measures are seasonally adjusted);
• Trimmed mean lifted 0.42%q/q (expected: 0.4%, prior rev: 0.31% from 0.41%), holding the annual pace at 1.19%. 
• Weighted median increased by 0.48%q/q from 0.25% (revised from 0.33%); the year over year pace firming to 1.36% from 1.23%.  

Consumer Price Index — Q4 | The details 

Inflation according to the CPI in the December quarter at 0.86% was a little stronger than the 0.7% pace that was anticipated by the markets; however, the breath of inflationary pressures remains narrow and are mainly the result of policy effects. Annual inflation of 0.86% on a headline basis and 1.19% on the RBA's preferred trimmed mean measure—well short of the central bank's 2-3% target range—remain consistent with an economy still very much in recovery mode from the pandemic shock. As a macro theme, the pandemic has weighed on services inflation (0.09%Y/Y) due to the impact of restrictions on activity, but goods inflation has been rising (3.39%) reflecting shifts in consumption patterns with spending in various areas (such as travel) being substituted for demand elsewhere (such as household goods and vehicles). 

One other point worth highlighting is that non-tradables inflation (1.54%Y/Y) is rising at the same time as tradables inflation fell back (-0.57%Y/Y), which is broadly reflective of conditions normalising in Australia at the same time as the disruptions from the pandemic were intensifying again offshore.   

Going across the baskets, the strongest contribution to inflation in Q4 came from alcohol and tobacco with the group rising 4.18%q/q (9.27%Y/Y) adding 0.43ppt to the CPI. This reflected the effects of annual excise tax increases in tobacco prices that applied from September 1. Furnishings, household equipment and services made the next strongest contribution to the quarterly CPI (0.35ppt) with prices up 3.44%q/q (3.63%Y/Y), though this was driven entirely by the winding up of free child care services which was one of the Federal government's pandemic response measures. 

Victoria's reopening led to out-of-pocket costs for child care returning with those services rising 37.7% in Q4. Note that there is also a crossover here into the education group (1.17%q/q) as it includes outside school hours care services (5.38%q/q) that were also covered by the free child care policy. The ABS advises that the furnishings, household equipment and services group would have fallen by 0.7% in Q4 if the impact of the return of child care costs was excluded, due to weakness in non-durable goods (-1.9%q/q), personal care products (-1.8%q/q) and furniture (-1.1%q/q). Meanwhile, the recreation and culture group lifted by 1.59%q/q (0.0%Y/Y) adding 0.16ppt to Q4 CPI. The driver was the return of domestic travel and accommodation (6.26%q/q) enabled by the reopening of state borders.

Transport costs were up 0.88%q/q (-4.6%Y/Y) adding 0.11ppt to Q4 CPI. This reflected higher public transport costs (4.5%q/q) after a period of discounting in Sydney came to an end, while new vehicle prices advanced (1.8%q/q) on strong demand. Petrol prices were contained in Q4 rising by 0.45%. The health group contributed 0.09ppt to Q4 CPI through a 1.3% price rise. This reflected the freeze on private health insurance premium increases ceasing and as a result, medical and hospital services costs lifted by 2.5%. 

Food and non-alcoholic beverages lifted by a modest 0.18% in Q4 (0.05ppt) around varying influences. The reopening in Victoria drove a 1.21% rise in restaurant prices, while supply-side factors resulted in higher fruit (3.38%) and beef prices (2.97%). However, these increases were moderated by a 5.97% fall in vegetable prices.    

The major weight on inflation in Q4 came from housing with the group falling 0.58%q/q (-0.9%Y/Y) for an overall contribution of -0.17ppt. As highlighted in our preview, the ABS had already advised that the group would be affected by a state government initiative in Western Australia in the form of $600 rebates on electricity prices. This resulted in electricity prices nationally slumping by 7.53%q/q (-9.22%Y/Y) reflecting a 66.7% fall in Perth due to the rebate. Moreover, the Federal government's HomeBuilder scheme together with additional incentives on offer in Western Australia and Tasmania restricted new dwelling costs to a 0.7% rise in Q4, which the ABS said in their absence would have lifted by 1.3%. After two consecutive quarterly falls, rents lifted in Q4 by a modest 0.09% (-1.33%Y/Y). The clothing and footwear group subtracted from Q4 CPI (-0.04ppt) with prices falling 1.05%q/q (-1.26%Y/Y) reflecting the effect of discounting associated with Black Friday sales. Communications were a modest weight on prices in Q4 (-0.02ppt) as equipment and service costs remained under pressure. 

Consumer Price Index — Q4 | Insights 

Inflationary pressures in the Australian economy remain narrowly based and continue to mainly reflect the impact of policy responses to the onset of the pandemic. While the recovery is well underway, and largely progressing well, spare capacity is still elevated and hence inflation is well short of the RBA's 2-3% target. If anything, given the RBA's stated focus on actual rather than forecast inflation, as well as a labour market that is a long way from what could be considered at levels of full employment, expect the Board to reiterate the need for its accommodative policy settings to be maintained at its upcoming February meeting. 

Preview: CPI Q4

Australian inflation is set to remain subdued with the ABS due to publish its December quarter update today at 11:30am (AEDT). The effects of government policy decisions in response to the onset of the pandemic continue to weigh on inflation; headline CPI is currently 0.7%Y/Y after rebounding from a 23-year low in Q2 (-0.3%), while the RBA's preferred trimmed mean measure is at a record low of 1.2%Y/Y. 

As it stands | CPI 

Australia's headline CPI rebounded by 1.6% in the September quarter — its fastest rise since Q2 2006 — lifting the annual pace to 0.7% from -0.3%. Trimmed mean inflation recovered from its first ever quarterly decline in Q2 (-0.1%) rising by 0.4% in Q3, though the pace through the year remained at its slowest on record at 1.2% (full review here). 

The reversal of government policy decisions in response to the pandemic crisis drove the rebound in inflation in the September quarter. Notably, child care costs returned to more normal levels for most of the country after the Federal government made those services free between 6 April to 12 July, though the policy still applied in Victoria due to the state entering a second shutdown. The other major contributor was a lift in petrol prices, in line with a rebound in global oil prices as economic activity got going again after earlier shutdowns. Meanwhile, household durable goods and private vehicles added modestly to inflation in Q3. 

Housing costs continued to restrain inflation, with new dwelling costs held to a 0.5% rise in Q3 as the Federal government's HomeBuilder grants scheme reduced the out-of-pocket cost for new eligible dwellings, and rents (-0.2%) declined again due to elevated capital city vacancy rates and mechanisms that enabled tenants impacted by the adverse economic conditions to negotiate reductions. A range of cost-saving measures to support households has also weighed on inflation, including freezes in property rates by local governments, state government initiatives to lower utilities costs, and private health insurers delaying premium increases. 

Market expectations | CPI

The median estimate is for the headline CPI to print at 0.7% in Q4 between a band of estimates ranging from 0.4% to 0.9%, with the annual pace expected to hold at 0.7%. Meanwhile, the trimmed mean measure is anticipated to come in at 0.4% in the quarter, with the annual pace to ease to 1.1% from 1.2%.

What to watch | CPI 

Recently, the ABS published this article outlining the policy-related impacts that will be evident in the December quarter CPI. Specifically, this includes the Federal Government's HomeBuilder grants ($25k), as well as additional incentives on offer by the state governments in Western Australia and Tasmania ($20k), with these measures to result in a decline in new dwelling costs by owner-occupiers. Also weighing will be the effect of a $600 electricity rebate for households in Perth. Note also that since the previous release, the ABS has completed its annual re-weighting of the CPI baskets (full details here). To account for the significant shifts in consumption patterns that have occurred since the onset of the pandemic, the ABS advises that around 20% of the weight of the CPI will come from higher frequency data sources such as retail sales and scanner data. 

Macro (Re)view (22/1) | Australian labour market continues recovery

The strong momentum in the recovery of the Australian labour market from the pandemic crisis was the key development domestically this week. For the month in December, employment matched consensus in rising by 50.0k adding to the gains in October (180.4k) and November (90.0k) (full review here). Back when the onset of the pandemic forced the economy to be shuttered, employment fell by 872.1k over April and May, but over the remainder of 2020 a stunning rebound occurred with 784.5k of those earlier losses coming back to the economy, with the only bump in the road coming in September (-44.1k) reflecting the impact of Victoria's return to shutdown (see chart of the week). Provided that the nation can continue to keep the virus at bay, the momentum should be able to continue in 2021.

Chart of the week 

Overall, the level of part-time employment has been more than fully restored and is around 25k or 0.6% higher than where it was pre-pandemic, but full-time employment has been slower to come back and is 112.4k or 1.3% lower over the period. But the good news is that over the December quarter, it was full-time employment (218.7k) that saw stronger growth than the part-time segment (101.7k), indicating that the recovery was broadening out with the earlier and more severe disruptions from shutdowns out of the way and with the benefit of more time enabling the strong fiscal and monetary stimulus response to gain significant traction. The unemployment rate declined by more than expected to 6.6% from 6.8% and is well down from its pandemic peak of 7.5%, but it is still a long way from levels that can be deemed acceptable and given that the participation rate lifted to a new record high in December at 66.2% significant policy support can be expected to remain in place for some time yet, particularly with the outlook being more uncertain than usual. 

The other data points out during the week highlighted the susceptibility of the economy to virus-related effects as occurred over the Christmas/new year period. This was seen in the softening in consumer sentiment with the Westpac-Melbourne Institute's index declining by 4.5% in January, though it was still sharply higher than a year earlier (14.6%). As this survey has consistently shown during the pandemic, covid-related uncertainty typically generates a deterioration in consumers' assessment of economic conditions and this was the case in January with the year-ahead outlook falling by 8.3% and the 5-year outlook declining by 4.5%, though both are elevated compared to the same stage in early 2020 at +21.1% and +31.6% respectively. On the back of this, the unemployment expectations index also took a hit rising by 11.9%, but it is still comfortably below its long-run average level. 

Meanwhile, Australia's flash PMI readings for January softened slightly in the month; the composite index easing from 56.6 to 56.0 as activity in the services sector slowed to 55.8 from 57.0 — attributed to the impact of the pandemic concerns and state border closures. But the overall levels still indicated that the economy was sustaining a solid pace of momentum. Lastly, December's preliminary estimate of retail sales pulled back by 4.5% in the month and may have been affected by weaker spending in Sydney following some localised virus clusters (NSW sales -5%m/m). However, it should be noted that in the month prior, retail sales had surged to a record high level after rising by 7.1%, boosted by Victoria's reopening and the Black Friday period (see here), so a slowing was not unexpected. Consider also that the level of spending in December was 9.4% higher than 12 months earlier and 9.2% above its pre-pandemic level.   

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Macro developments over the past week offshore were shaped by central bank meetings, comments from US Treasury Secretary nominee Janet Yellen following President Biden's inauguration and the latest global economic activity surveys at the start of the year amid ongoing caseloads and containment measures. There were few expectations from the market going into this week's European Central Bank (ECB) meeting given that the Governing Council had significantly eased its monetary policy stance in December, and that was largely how things played out with the decision statement confirming no policy changes. The statement did, however, give greater prominence to the point that the ECB has been keen to highlight of late, which is the degree of flexibility of its Pandemic Emergency Purchase Programme (PEPP) to respond to changes in financing conditions. In the post-meeting press conference, ECB President Christine Lagarde said that the Governing Council's objective is to maintain "favourable financing conditions" to offset downside risks to its inflation outlook as a result of the pandemic. 

Further expanding on this, President Lagarde outlined that the Governing Council's assessment of financing conditions was based on "a holistic and multifaceted approach" involving a range of indicators such as credit growth, sovereign bond yields, and yields on corporate bonds, but that if they were to remain favourable, then the full €1,850bn envelope under the PEPP need not be exhausted. Equally, however, the quantum of purchases could be recalibrated higher if financing conditions were to deteriorate. On the economy, President Lagarde said that the imposition of shutdowns would result in GDP contracting in Q4 and then weigh on activity through Q1, as highlighted by the weakening in the euro area composite PMI with January's flash reading diving deeper into contraction at 47.5 from 49.1 in the month prior. Still, the ECB's assessment was that some of the downside risks to its growth outlook had lessened due to the vaccine being rolled out and the recent Brexit agreement.

Other major central banks that met during the week included the Bank of Japan and Bank of Canada, with both reiterating the need for their highly accommodative policy stances to remain in place until the effects of the pandemic on their respective economies had dissipated. Over in the US, the former Federal Reserve Chair and current Treasury Secretary nominee Janet Yellen during testimony urged Congress to "act big" by taking advantage of historically low interest rates and ramping up spending to pursue the agenda of the Biden Administration around issues of economic inequality as well as the response to the pandemic. The current proposal as outlined last week is a $1.9tn stimulus package, though to pass the Senate the bill would need full Democratic support as well as the votes from at least 10 Republican senators, which according to the reports appears difficult even at this early stage. Attention now turns to next week's Federal Reserve meeting where markets will be keen for insight around how it is assessing the outlook and the implications for asset purchases. It is possible that the FOMC delivers a relatively upbeat message next week with the vaccine roll-out underway and with signs of resilience in the economy; the flash composite PMI for January advancing to 58.0 from 55.3 on stronger manufacturing activity (59.1 from 57.1) and an encouraging lift in the services sector (57.5 from 54.8), but January's weak non-farm payrolls outcome (-140k) should temper any optimism.  

Australian employment +50.0k in December; unemployment rate 6.6%

A further net 50.0k jobs were added back to the Australian economy in the month of December with the recovery in the labour market from the pandemic crisis carrying strong momentum into year-end. The unemployment rate fell by more than expected to 6.6% from an earlier peak of 7.5%, while the participation rate lifted to a record high at 66.2%. 

Labour Force Survey — December | By the numbers

• Employment (on net) lifted by 50.0k in December, in line with consensus, after adding 90.0k in the month prior. 

• Australia's unemployment rate continues to fall coming down by a further 0.2ppt to 6.6% (exp 6.7%) from its pandemic peak of 7.5% in July.

• The participation rate lifted to a record high of 66.2% after rising by 0.1ppt in the month; a remarkable feat given in had plunged to a 21-year low just 7 months ago. 

• Total hours worked were broadly flat in the month (0.1%) at 1.753bn hours, with the part-time segment down 0.9%, widening the decline over the year to -1.5% from -1.2%.

Labour Force Survey — December | The details

Labour market conditions continue to repair from the damage inflicted by the disruptions stemming from the onset of the pandemic, with employment rising by a further 50.0k and spare capacity continuing the descent from peak levels around the middle of the year; the unemployment rate falling to 6.6% from an earlier high of 7.5%, while underemployment is now at 8.5% and, remarkably, lower than it was pre-pandemic after peaking at 13.8%, and underutilisation has reduced by 5 percentage points to 15.1% over the past 8 months. Encouragingly, this has occurred alongside participation in the labour force surging back to what is now a record high level. 

All in all, these developments reflect the level of dynamism in the economy, with activity being enabled to recover as a result of the pandemic being kept under control by the public health authorities and the very strong response from the monetary and fiscal authorities. Testament to this was a strong 3.2% lift in hours worked over Q4. Total employment is now 0.7% below its pre-pandemic level from an earlier trough of -6.7%, while hours worked are still down by 1.4% on their level from immediately before the crisis after collapsing by as much as 10.4% as of May. The effects of the Federal government's wage subsidy scheme and other income support measures have meant that the pandemic has had a comparatively larger impact on hours worked than employment. 

For the third straight month, full-time employment led the way rising by 35.7k compared to a smaller 14.5k increase in the part-time segment. Early on in the reopening effort, part-time employment rebounded very quickly as the easing of restrictions allowed activity in the most affected sectors to resume. But as the year went on, the recovery broadened out and this was the key theme in the December quarter with full-time employment rising 218.7k over the period compared to a 101.7k lift in part-time work. But despite the progress, employment (-1.3%) and hours worked (-1.9%) in the full-time segment are still below their pre-pandemic levels whereas they have more than fully recovered in the part-time space (employment +0.6% and hours worked +1.4%) so there is still some way to go in the recovery. 

Victoria's reopening from its second shutdown that overlapped Q2 and Q3 was key to driving employment over the December quarter, rising overall by 170.3k to account for a little more than half of the increase nationally (320.4k). Pleasingly, the gains in employment were broad-based across the nation for the most recent quarter as the chart (below) shows, though a weak outcome in New South Wales in December (-17.1k) cut back some of the contribution from that state.  

Meanwhile, hours worked have recovered to be around or a little above their pre-pandemic levels in Queensland, Western Australia, South Australia and Tasmania, though the two largest states by population, which have also had the highest case counts, in New South Wales (-1.2%) and Victoria (-4.5%) are holding things back. 

Labour Force Survey — December | Insights

The recovery had established strong momentum into the end of the year with jobs being added back to the economy at a faster pace than people were returning to the labour force in both November and December. With participation now at a record high, the key will be to sustain a strong pace of employment growth to make further inroads into the level of spare capacity that is still elevated. But, as long as the pandemic remains under control requiring fewer restrictions to be left in place, there is reason to be optimistic that this trend can continue.

Preview: Labour Force Survey, December

Australia's December labour force survey is due for release by the ABS at 11:30am (AEDT) today. The momentum of the recovery in the labour market from the pandemic crisis was gathering pace towards the end of the year with Victoria reopening more widely and the effects of the earlier disruptions across the rest of the nation fading. By November, the unemployment rate had lowered to 6.8% from its peak of 7.5% in July, while rates of underutilisation were also coming down sharply with employment and hours worked on the rise. 

As it stands | Labour Force Survey

Employment (on net) came in much stronger than expected in November rising by 90.0k against the consensus estimate for a lift of 40.0k. This followed on from the 180.4k surge in October that defied expectations for a drift lower of -27.5k. Over these past two months, the key factor has been the reopening in Victoria from its second shutdown with employment in the state rising by around 156k. Solid increases in New South Wales (61k) and Western Australia (27k) over the period also added to the momentum. 

The composition of the strong gain in employment over October and November is also worth highlighting. In the 3-month period to August when the economy was reopening from the national shutdown and restrictions were being wound back, employment rebounded by 508k with the part-time segment (458k) accounting for most of the increase. Victoria's statewide shutdown then stalled the recovery in September, but over October and November the nature of the recovery was broadening out with full-time employment (183k) contributing the bulk of the increase in total employment (270k). The effect of rising employment was evident in a sharp lift in hours worked in November (2.5%) building on the 1.2% lift in the month prior.

The other notable aspect is that following a 0.3ppt lift to 66.1%, the nation's participation rate now matches its pre-pandemic record high; this after collapsing to a 21-year low of 62.6% as of May. Even as this has occurred, inroads have been made into spare capacity with the unemployment rate declining 0.2ppt to 6.8% in November, while underemployment fell 1ppt to 9.4% and underutilisation lowered to 16.2% from 17.4%. 

Market Expectations | Labour Force Survey

The market looks for further improvement in the labour market towards the end of the year with its median estimate for the employment number sitting at 50.0k. This would be a slowdown on the past couple of months but still a respectable outcome if it eventuates. Meanwhile, the headline unemployment rate is forecast to ease 0.1ppt to 6.7%.    

What to watch | Labour Force Survey

Over recent months we have been closely watching full-time employment for signs of a broadening out in the labour market recovery so that remains in focus. Something to keep in mind is that part-time employment is often strong in December reflecting seasonal hiring, though whether this holds up during pandemic times is anyone's guess. Meanwhile, the change in hours worked over the quarter should give should us a rough guide to GDP growth prospects in Q4. The participation rate will also be of interest after matching its record high in November. 

Macro (Re)view (15/1) | New year, familiar dynamics

In the early stages of the new year, the reflation dynamics discussed pre-Christmas have largely held up, with a steepening in US Treasury yields at the long end of the curve at the centre of developments. Where there has been some modest divergence from this theme has been in the US dollar, which has found some support on the back of the lift in rates. US politics continues to dominate the headlines following the events at the Capitol last week, but for markets, the outcomes in the recent Georgia runoff elections have been more influential after the Democrats won the two Senate seats being contested to secure the 'blue sweep' where the incoming Biden administration will (on paper at least) have the numbers in both houses. This clears the way for large-scale fiscal stimulus to be injected into the economy to support the recovery together with the roll-out of vaccines. Details of the fiscal agenda the Biden administration will pursue were unveiled this week with a $1.9 trillion package on the table. The proposal includes around $1.5 trillion in economic stimulus and aid for state and local governments, including cheques of $1,400 for most Americans following on from the $600 payments that went out in December, a $400 per week enhancement to unemployment benefits through to September, and around $0.4 trillion of pandemic-related health measures. 

Over the past few weeks, market-based measures of inflation expectations have continued to build up and currently sit at around their highest since late 2018 at a little above the Federal Reserve's 2% target. While there has been some speculation from Fed officials that the dynamics could lead to a faster recovery than anticipated, possibly opening the door for a tapering in asset purchases from their current $120bn/mth pace later in the year, the consensus within the policy-setting FOMC is that it is too early to be having those discussions — a point highlighted by Chair Jerome Powell and Governor Lael Brainard this week. Certainly, the data flow is a long way from where it needs to be for any change in policy under the Fed's new average inflation targeting framework to be even coming across the radar after non-farm payrolls fell for the first time in 8 months with a 140k contraction coming through in December; while both headline (1.4%yr) and core CPI (1.6%yr) remained soft in December, and retail sales posted their third consecutive monthly contraction with a 0.7% decline in December as control group sales came in much weaker than expected at -1.9%m/m. 

Over in Europe, it has been an eventful start to 2021 with national governments across the continent moving towards extending shutdowns and tightening restrictions in an attempt to limit the spread of the variant strain of the virus. At this stage, shutdowns appear likely to remain in place for much of the first quarter and it is a similar situation in the UK, with the latter in the process of ramping up its vaccine roll-out strategy. But at this stage markets are looking through the implications and are focusing on reopenings from Q2 onwards. The same could be said of the European Central Bank with President Christine Lagarde in a Reuters forum this week outlining that the bank's forecast for GDP growth in 2021 of 3.9% was "still very clearly plausible" given that its current set of macroeconmic projections that were tabled at the December meeting were conditioned on the basis of shutdowns persisting through the first quarter of the year. Meanwhile, the account of the ECB's policy meeting in December outlined that while there had been "broad agreement" by members of the Governing Council to expand the size of asset purchases under its PEPP program by €500bn to €1,850bn some had advocated for a more moderate increase, judging that "keeping some powder dry" was wise in the circumstances of highly elevated uncertainty, though arguments for a larger increase to the envelope were also put forward. Ultimately, though, the main element of the PEPP program the Governing Council continues to emphasize is its flexibility, providing it with the ability to adjust the pace of purchases in line with prevailing conditions. Also gaining focus this week was Italian politics with the ruling coalition government plunging into crisis after it lost the support of Matteo Renzi's party over a range of grievances relating to the pandemic and economic matters, with reports indicating PM Conte will attempt to hold the administration together through support from opposition ranks. 

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Switching the focus onshore, there was positive news on the pandemic front after recent concerns around outbreaks over the Christmas/new year holiday period with zero cases of local transmission recorded nationally over the past couple of days, while a snap 3-day lockdown implemented in Brisbane was lifted as planned after the Queensland authorities determined the risks of transmission emanating from hotel quarantine had receded. The domestic economic data through the week remained consistent with the strong momentum that was building into year-end. A wider reopening in Victoria from the state's second shutdown and the effect of the Black Friday promotional period drove a 7.1% acceleration in retail sales for the month in November, with the pace up 13.3% through the year — its fastest in more than 19 years (reviewed here). Key to the momentum in retail sales since the reopening of the national economy (shown in the chart of the week, below) has been the very significant level of savings that households have built up via fiscal stimulus measures that have supported incomes through the pandemic as well as shifts in consumption patterns in response to restrictions on activity. 

Chart of the week

Also benefitting from policy stimulus has been the housing market with the value of borrower-accepted financing commitments lifting by a further 5.6% in November to a new record high level at just below $24bn, with strong rises for both the owner-occupier (5.5%) and investor (6.0%) segments (reviewed here). Outsized gains came through in Victoria with the reopening enabling stimulus measures from low rates, the HomeBuilder scheme, and first home buyer incentives to gain traction. Also highlighting the effects of policy stimulus on the housing market, detached dwelling approvals advanced by 5.9% in November to stand nearly 35% above their level from a year earlier (see here). There was also upbeat news on the labour market with the ABS job vacancies series surging by 23.4% in the 3 months to November with all states outside of Victoria rising above their pre-pandemic levels. Lastly, the nation's trade surplus pulled back to $5bn in November in the latest data published last week with spending on imports rising at their sharpest monthly pace in nearly 18 years (see here). 

Australian housing finance rises further in November

The reopening in the state of Victoria helped drive Australian housing finance commitments to a new record high level in November as policy stimulus measures continue to boost activity, notably in the first home buyer segment. 

Housing Finance — November | By the numbers

• Housing finance commitments (in $ value terms, ex-refinancing) lifted for a 6th consecutive month with a much stronger than expected rise of 5.6% coming through in November to $23.96bn (exp 1.2%, prior 0.7%). The annual pace inched up to 23.7% from 23.3%.   
• Owner-occupier commitments advanced by 5.5%m/m to $18.34bn to be up 31.4% over the year (prior: 0.8%mth, 31.2%yr). 
• Refinancing to the owner-occupier segment pulled back sharply in the month (-15.9%), with the level at $6.22bn up 1.2% on a year earlier.  
• Investor commitments increased by 6.0% in November to $5.61bn (prior: 0.3%) as the annual pace lifted to 3.9% from 2.8%.

Housing Finance — November  | The details 

The value of Australian housing finance commitments rose at an accelerated pace in November (5.6%) relative to the median estimate (1.2%) as activity in Victoria resumed on the state's reopening from its lockdown, enabling the effect of policy stimulus from low rates and the Federal Government's HomeBuilder scheme to gain hold, together with existing incentives for first home buyers. Commitments to the owner-occupier segment nationally are 31.4% higher than a year earlier reflecting the effects of the range of policy stimulus in the system compared to a more subdued investor segment (3.9%yr), with elevated capital city vacancy rates following the closure of the international border a headwind in that market. 

A key factor driving the upswing from owner-occupiers has been the surge in activity from first home buyers, with most states making incentives to the segment more generous as a stimulus response to the pandemic. The level of first home buyer commitments were up by 46.7% over the year in November at $5.7bn, while the number of approvals had risen at a similar pace (47.6%) to 13,905. 

The effect of state government first home buyer incentives can be seen in the next chart, with the sharpest rises occurring in Western Australia (101%yr) and Queensland (78%yr). 

Staying with the state by state theme, owner-occupier commitments are shown in the chart below, with the effect of Victoria's lockdown evident through its stop-start recovery. 

Activity in the investor segment was coming from a low base and the pick up that has since occurred has been more modest than in the owner-occupier segment. Again, Victoria is lagging in that broader turnaround. 

On the owner-occupier approvals numbers, the standout has been in the construction-related area to either fund the construction of a new build or to purchase a newly completed home. Approvals of this type jumped another 6.0% in November to be up by 65.5% over the year, which reflects the effect of the HomeBuilder scheme. This is particularly evident in approvals for new construction which have soared by 99% over the period. 

 Housing Finance — November | Insights

Victoria's reopening ensured it was another strong outcome for housing finance commitments and approvals in the month of November. The range of policy stimulus measures have had a profound effect on the housing market and this is, for the time being at least, outweighing more medium to longer-term headwinds associated with low population growth and elevated spare capacity in the labour market. Property prices have turned higher after a period of decline in the middle of last year and appear poised to rise further in the months ahead.