Australian housing finance down 4.3% in August

Australian housing finance commitments fell by more than expected in August, posting their steepest decline since May 2020 with key policy stimulus measures unwinding, demand cooling in response to the sharp rise in housing prices, and as the impacts of lockdowns in New South Wales and Victoria disrupted activity. 

Housing Finance — August | By the numbers

• Housing finance commitments ($ value, ex-refinancing) fell by 4.3% m/m in August vs -2.0% expected (prior: 0.2%) — to $30.8bn, with annual growth moderating to 47.4% from 68.2%.  
• Owner-occupier commitments contracted by 6.6% in the month (prior:-0.4%m/m) to $21.3bn, slowing growth over the year to 33.5% from 58.3%. 
• Investor commitments lifted by 1.5%m/m (prior: 1.8%) to come in at $9.5bn, for annual growth of 92.2%. 
• Total refinancing activity advanced by a further 3.2%m/m (prior: 6.0%) to $17.8bn (58.1%yr), led by the investor segment (11.5%m/m) as owner-occupiers declined (-1.0%m/m). 

Housing Finance — August | The details 

The effects of the end of the HomeBuilder scheme and state-based initiatives, rising housing prices reducing affordability, and lockdowns in New South Wales and Victoria weighed on housing finance demand in August. Commitments (in value terms) saw their sharpest month-on-month fall (-4.3%) since the outset of the pandemic.

The owner-occupier segment drove the headline fall, with commitments down 6.6% on the month, for its steepest fall in 15 months. Within the segment, there were declines from upgraders (-7.1%m/m) and first home buyers (-4.1%), and the construction-related category (-4.7%) continued to reflect the unwind from the expiry of the HomeBuilder scheme.

Momentum in commitments to the investor segment has slowed over the past 3 months from the very strong pace of growth seen earlier in the year, but they still advanced in August (1.5%) and are at an elevated level at $9.5bn — its highest going back to 2015.   

Activity in the first home buyer segment is continuing to retrace from its recent peak due to the unwind of policy stimulus measures and as concerns over affordability due to rising housing prices weigh, while lockdowns were also a headwind. Commitments to the segment declined by 4.9%m/m to $5.6bn, while the number of approvals made by lenders fell 3.0%m/m to around 12.5k. 

Approvals to the owner-occupier segment were down across the categories in August, with upgraders -3.4% (22.2%yr) and construction-related -7.4% (5.2%). The latter is winding down from HomeBuilder, with approvals for newly-constructed homes -12%m/m and those to facilitate new builds -4.9%m/m.     

Commitments at the state level and across the major segments are summarised in the table below. Lockdown impacts were weighing in New South Wales and Victoria. 

Owner-occupier commitments are easing off their recent peaks in all states, but they remain at very high levels reflecting the boost from stimulus measures and rising housing prices.    

Housing Finance — August | Insights

A sharper-than-expected pullback in commitments in August was driven by a combination of factors, including the runoff of policy stimulus, rising housing prices slowing demand, and the disruptions associated with state lockdowns in New South Wales and Victoria. Conditions might be cooling in the major housing markets, though they still remain very robust according to most indicators. Just today, CoreLogic reported that prices nationally were up another 1.5% in September, to be 17.6% higher than at the end of 2020. Earlier this week, the quarterly statement from the Council of Financial Regulators signalled that macroprudential measures were being considered. 

Australian dwelling approvals rise 6.8% in August

Australian dwelling approvals lifted for the first time since the expiry of the HomeBuilder scheme posting a 6.8% rise in August. That defied expectations for further weakness as both detached and unit approvals increased. 

  

Building Approvals — August | By the numbers

• Dwelling approvals (seasonally adjusted) posted an unexpected rise in August, up 6.8%m/m to 18,716 against the market consensus for a 5% fall (prior -8.6%). Annual approvals growth lifted from 21% to 31.2%.

• House approvals lifted by 3.8%m/m to 12,125 (23.7%yr)

• Unit approvals advanced by 12.7%m/m to 6,591 (47.7%yr)

Building Approvals — August | The details 

An upside surprise on building approvals in August ended a run of four consecutive monthly falls following the expiry of the HomeBuilder scheme. After falling by 25% from their March peak, dwelling approvals were up 6.8%m/m in August. Gains were seen in units (12.7%) and detached houses (3.8%m/m), with both segments posting their best outturns since March and April respectively.

Notwithstanding the HomeBuilder expiry, support from low interest rates and rising housing prices are supporting approvals. Even with the bring-forward effect from HomeBuilder now unwinding, private sector detached approvals are almost 40% higher than pre-pandemic levels. Unit approvals were less supported by these factors, but have lifted from last year's depths where the pandemic was a significant headwind on demand.  

Despite the return of lockdowns, New South Wales (7%) and Victoria (9.6%) were key drivers of the rebound in house approvals in August, with South Australia (16.5%) also contributing. Queensland and Western Australia are recalibrating from their HomeBuilder-driven highs. 

 

Alteration approvals showed renewed strength in August, rising by 10%m/m — to be only slightly below their recent peak. As with approvals for new builds, alterations are being supported by easy financing conditions and a robust housing market. More time at home in response to the pandemic has also been a factor in people making improvements to their homes.   

Building Approvals — August | Insights 

Dwelling approvals rebounded in August despite the return of lockdowns and the winding down of policy supports. Beyond the lockdown disruptions that restricted activity on sites more than in earlier lockdowns, capacity constraints emerging from the elevated pipeline of work that has accumulated could be a limiting factor on approvals. 

Macro (Re)view (24/9) | Paths to policy normalisation

In a policy-heavy week, meetings at 6 of the G10 central banks, as well as several in emerging markets, featured. As the OECD outlined in its latest outlook, the meetings came at a complex time amid intensifying headwinds to global growth from the Delta variant, supply constraints and rising inflation, while the concerns around Evergrande in China are a recent addition. In the advanced economies, patient stances continued to be maintained at the BoJ, SNB and Riksbank as others look to chart the course in dialing back peak monetary policy support. In fact, the Norges Bank is already there raising rates from zero to 0.25% this week.  

Undoubtedly though, the US Federal Reserve's meeting was this week's highlight. While the FOMC announced an unchanged stance, it guided markets towards the start of policy normalisation. This came on the back of its updated summary of economic projections that reflected confidence in the US outlook once the near-term uncertainties fade. Delta concerns have lowered the median estimate for 2021 GDP growth to 5.9% from 7.0% but assessments in the out years were upgraded to 3.8% in 2022 and 2.5% in 2023. The Delta presence leads to a more cautious assessment of the unemployment rate in 2021, now expected to fall to 4.8% compared to 4.5% anticipated in June, but the forecasts for 2022 (3.8%) and 2023 (3.5%) remained intact. Reflecting the persistence of supply constraints, substantial upward revisions to both headline (4.2% from 3.4%) and core (3.7% from 3.0%) inflation were put forward by the FOMC members in 2021, with moderating overshoots on the 2% target seen thereafter through to 2024.

With the inflation side of the dual "substantial further progress" test stipulated by the Committee to start tapering asset purchases met, developments in the labour market are left dictating the timing. On this, Chair Jerome Powell in the post-meeting press conference said that in his view the employment aspect of the test was "all but met", firming up expectations for a November tapering announcement, with the process to be completed by "around the middle of next year". Given the current $120bn per month run rate, that implies a slowing of around $15bn per month, assuming a straight-line tapering. Throughout recent communications, Chair Powell has been keen to delink tapering from signaling on rates, with a "substantially more stringent" test attached to commencing lift-off from near zero. The revised dot plot shows expectations for the timing of the first rate hike are split between late 2022 and early 2023. Notably, the dots have taken on a steeper trajectory since the June projections, rising to 1.8% by 2024. That is pointing to more rate hikes than the 3-4 markets are pricing in over the period, leaving bond markets to reassess the situation over recent days. 

The sense coming from this week's Bank of England meeting was that the Monetary Policy Committee (MPC) was moving closer to exiting from the emergency settings it implemented at the nadir of the pandemic. In an unchanged decision on Thursday, the accompanying minutes noted a "strengthened case" had developed for the guidance the MPC put forward at the previous meeting that the expected path of the economy would likely be consistent with a "modest tightening of monetary policy". The key development over the intervening period had been a sharp rise in the pace of annual inflation from 2.0% to 3.2% in August, to be more than 1ppt above the MPC's target. As noted by the MPC, the rise could extend to a pace above 4% in Q2 next year due to higher energy and goods prices. In their exchange of letters, Chancellor Sunak had agreed with Governor Bailey's assessment that base effects associated with the reopening and capacity constraints were driving up inflation but welcomed that over the medium term the pace was expected to moderate back towards the target. With the BoE's asset purchases on track to be completed by around the end of the year, attention has turned to rates where markets are pricing in around 2 hikes next year. But with considerable uncertainty around the outlook for wages growth and how the labour market will respond to the end of the furlough scheme, those expectations may prove too optimistic.    

Over in Europe, signs are evident that the robust recovery there is starting to lose some momentum with capacity constraints and rising prices weighing on output. The September flash Composite PMI at 56.1 remained at levels consistent with strong expansion, but that was a 5-month low and it marked a sharper slowdown than markets had expected (58.5) from August's reading (59.0). Delta appeared to be weighing on services with activity in the sector slowing from 59.0 to 56.3 in September. Meanwhile, the manufacturing PMI came out at 58.7 — its softest reading in 7 months and well down from 61.4 in August. Production at responding manufacturers had recorded its slowest increase since around the turn of the year with supply chain bottlenecks and product shortages causing a further rise in order book backlogs. In the knowledge that manufacturers are sitting on low inventory levels, suppliers are continuing to push through higher prices with input costs in the sector rising to around record highs. While rising prices are coming down the pipeline to households, the ECB's latest Economic Bulletin noted that these pressures were expected to fade from early next year.  That said, a Reuters report during the week quoting Governing Council sources said that preparations were being made for PEPP purchases to wind up as planned in March on the basis that inflation could rise by more than currently expected. So as to avoid "cliff effects" once the $1,850bn programme concludes, a temporary boost to its Asset Purchase Programme was being considered.   

In Australia, the minutes from the RBA's September meeting reiterated that the Delta impact and associated lockdowns would delay, but not derail, the recovery. At that meeting, the Board stuck to its modest tapering announcement of weekly bond-buying from $5bn to $4bn, but the setback to the economy prompted it to push back the timing of the next review from November to February. The RBA expects that it will take until mid next year for the economy to return the trajectory it was on prior to the Delta outbreaks. However, the minutes noted that the Board still judged that tapering was warranted, citing that this was the path many of its global peers was on. Instead, the Board saw greater option value in the recailibration it made to the next review date, with markets now having greater clarity over its bond purchases for longer.    

Macro (Re)view (17/9) | Strength in resilience

The sharp deterioration in the Australian economy since the middle of the year following the rise of the Delta variant and broad-based lockdowns was confirmed by this week's labour market data. Employment recorded its steepest decline since the 2020 national lockdown with 146.3k jobs lost in August. With caseloads surging and restrictions tightening New South Wales has seen a 210k fall in employment since the lockdown was called in June. Mobility restrictions and the current design of support payments have seen labour force participation fall away by 1ppt over the past couple of months to 65.2%; the decline in New South Wales a sobering 3.5ppts to be near the levels the state saw in the depths of 2020. Falling employment and a shrinking labour force saw hours worked crunched lower by 3.7% in August to be 2.9% below the level that prevailed before the pandemic emerged (see chart below). Hours worked in New South Wales have collapsed to be 11.1% below their pre-pandemic level, with the Delta hit proving to be a greater disruption than anything seen there in 2020. The fall in hours worked in Victoria and across the rest of the nation highlights the widespread hit to economic activity. For a full review of the August Labour Force Survey see here.   

Chart of the week 

Readings from this week's NAB Business Survey showed mild improvements in confidence and conditions in August. But, since June, both have deteriorated very sharply with confidence falling from +10 to -5 and conditions down from +24 to +14. The latter is still well above average in absolute terms, reflecting its strong pre-Delta position and more resilience to the current disruptions than seen in earlier lockdowns. Resilience was also a key theme in the latest consumer sentiment survey with the Westpac-Melbourne Institute Index rising by 2% in September. Westpac's Chief Economist Bill Evans attributed the result to confidence that the accelerating progress in vaccinations will bring the difficult times to an end. While the level of optimism has fallen by around 6% compared to pre-Delta, at a 106.2 reading the index remains strong. This is sending an important signal in that it supports the thesis that household spending will rebound sharply when the lockdowns have run their course. In the housing market, the survey highlighted renewed concerns over affordability following the strong rise in prices seen over the first half of the year. Data from the ABS this week showed a record quarterly increase in housing prices of 6.7% in Q2 (see here).  

The speech from RBA Governor Philip Lowe to the Anika Foundation reiterated the key theme discussed from last week's Board meeting that the Delta disruptions had delayed, but not derailed, the recovery. A boost to already high accumulated savings from enhanced fiscal support was providing the RBA confidence that household spending will get the recovery back on track once vaccinations have hit their targets. Of note in the speech was the push back from Governor Lowe to current pricing in rates markets for the cash rate to start rising from late 2022. Outside of transitory effects, the low wage and inflation dynamics in place prior to the pandemic are expected by the RBA to persist, with the Board signaling it does not anticipate to be raising rates before 2024.

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Switching offshore, the transitory inflation narrative was in focus as was the slowdown in activity in response to Delta. Notably, tightened restrictions saw China retail sales slowing sharply from 8.5% to 2.5%Y/Y in August. That was against a consensus estimate for a moderation in growth to 7.0%Y/Y. Other activity data for industrial production (5.3%Y/Y) and fixed asset investment (8.9%ytd) also slowed by more than expected. Meanwhile, developments around the Evergrande situation have been a key factor driving sentiment in Asian equity markets in particular on reports of contagion risk. 

In the US, inflation data slowed in August as price pressures associated with the reopening of the economy showed signs of cooling. Headline CPI posted its slowest month-on-month increase this year at 0.3% (vs 0.4% expected) as the annual rate matched consensus in easing 0.1ppt to 5.3%. A more pronounced slowing was seen in core CPI at 0.1%m/m (vs 0.3%) as 0.3ppt came off the annual rate to 4.0% (vs 4.2%). The main story was that price declines were recorded in many of the categories that have been boosting inflation of late where demand has surged on the reopening. Including in this was used cars (-1.5%m/m) and travel-related areas in airfares (-9.1%m/m), car rentals (-8.5%m/m) and hotels (-3.3%m/m). From a broader perspective, durables CPI — key in driving the inflation surge — saw its weakest month-on-month outcome (-0.2%) since January, while services CPI was little more than flat (0.1%m/m). Concerns that high inflation could be weighing on consumer spending look to be misplaced as retail sales came in above estimates in August, rebounding from the weakness seen in July. Headline sales lifted by 0.7%m/m, defying consensus for a -0.7% result. Strong beats also came through in core sales (ex-autos and gas) at 2%m/m and in the key control sales group at 2.5%m/m, both of which had been expected to come in flat in August. Given the underlying composition of sales, the Delta impact may have been evident with rises in the stay-at-home areas including nonstore (online) retail (5.3%m/m), food and beverage (1.8%m/m) and furniture (3.7%m/m). At the same time, spending at restaurants and bars pulled back to be flat in August after rising by 1.3% in July. 

Across the Atlantic, reopening effects were playing through in surging inflation readings. In the UK, inflation printed above expectations in August, with the headline CPI rising from 2.0% to 3.2%Y/Y — a 10-year high — as core CPI elevated from 1.8% to 3.1%Y/Y. This takes both measures to more than 1ppt above the Bank of England's target ahead of next week's policy meeting. The rise predominantly reflected the downward impact on inflation associated with the government's discounted eating out scheme from last year falling out of the 12-month calculation. But there were also boosts coming from the reopening with strong rises in airfares (10.9%m/m), accommodation (5.9%m/m) and used cars (4.9%m/m). Similar dynamics are evident in the euro area where headline inflation was confirmed to have risen to its highest since 2011 at 3.0%Y/Y to August from 2.2%, while annual core inflation is at a 9-year high at 1.6%. ECB Executive Board member Isabel Schnabel addressed the matter in a speech this week, noting that a range of base effects, including from the reversal of the temporary cut in the German sales tax and from reopening distortions, were driving inflation higher. However, under the ECB's reformulated forward guidance, policy will not be reacting to short-term volatility in the data. As Ms. Schanbel outlined, the emphasis is on ensuring the inflation outlook is converging around the 2% target one and two years out before rate hikes will be considered to prevent the risk of tightening prematurely and slowing the recovery. 

Australian employment -146.3k in August; Hours worked -3.7%

Australian employment fell by its most since the onset of the pandemic as 146.3k jobs were lost in August with much of the nation in lockdown. Hours worked declined significantly (-3.7%m/m) as activity was disrupted and Australians stayed at home. Participation in the labour force has fallen sharply since the middle of the year and has collapsed in New South Wales to be around the depths seen in 2020. 

Labour Force Survey — August | By the numbers

• Employment (on net) fell by 146.3k in August, larger than the median estimate of -80k. July's initially reported 2.2k increase was revised up to 3.1k. 

• The measured unemployment rate moved down by 0.1ppt to 4.5% vs 5.0% expected — an outcome to be ignored in the circumstances given it was driven by people exiting the labour force. Significant rises in rates of underemployment +1ppt to 9.3% and underutilisation +0.9ppt to 13.8% provide a more accurate reflection of conditions. 

• Labour force participation declined from 66.0% to 65.2% — a 10-month low. Participation in NSW fell 2.5ppts to 62.4% to be around the level seen during the national lockdown. 

• Hours worked nationally fell by 3.7% in August following a 0.2% decline in July. Since the onset of Delta, hours worked across the economy are down 3.9% — a severe change in conditions from the strong momentum seen in the previous quarter (2.9%).

Labour Force Survey — August | The details

The spread of the Delta variant and associated lockdowns across Sydney, Melbourne, Brisbane and the ACT saw a severe deterioration in conditions in the labour market in August. Employment fell by its most since the 2020 national lockdown, down 146.3k for the month but was still just above its pre-pandemic level. This was driven by a 172.8k fall in New South Wales as the Sydney lockdown was extended; employment in the state has now contracted by around 210k since the Delta onset. Queensland posted a 29.8k fall in employment associated with the lockdown in the state's south-east corner. Victoria surprised with employment lifting by 29.1k, though that could easily unwind next month.      

Both the part-time and full-time segments saw their sharpest falls since the national lockdown. As was the case then, the loss of employment was more severe in the part-time segment (-78.2k) than in full-time (-68.0k) in August. 

Overall, part-time employment has slid to 1.5% below its pre-pandemic level but in stark contrast full-time work is 1.0% higher over the period, highlighting the larger effects of lockdowns on the former.

Hours worked were crunched by 3.7% in the month, to be down by 2.9% on its pre-pandemic level. Tighter restrictions in Sydney led to hours worked in New South Wales falling by a further 6.5%m/m after a 7.0%m/m fall in July. As the chart below shows, the hit to hours worked in New South Wales through the Delta period has exceeded the disruptions at the onset of Covid. With Victoria returning to lockdown, hours worked there fell by 3.4%m/m and reversed much of the reopening burst seen in July. Hours worked across the rest of the nation fell by 1.9% in the month, weighed by lockdowns affecting Queensland (-5.3%m/m) and the ACT (-2.5%m/m). 

The disruptions of the lockdowns and the structure of fiscal supports — with payments going from the government to workers directly rather than through firms' payrolls — drove a steep fall in participation, from 66.0% to 65.2%. Meanwhile, the hit to jobs saw the employment to population ratio rolling over to its weakest level since early in the year.   

Participation in New South Wales has collapsed over the past couple of months and at 62.4% is around the depths it reached during the national lockdown last year.  

With the size of the labour force (-168.1k) falling by more than employment (-146.3k), the measured unemployment rate eased from 4.6% to 4.5%. Clearly, that is not an accurate reflection of conditions. The rise in underemployment (9.3%) and underutilisation (13.8%) since the middle of the year speak to the disruption that has occurred in the labour market and the loss of hours due to lockdowns.

Labour Force Survey — August | Insights

The strong momentum that had built up in the Australian labour market was turned upside down since the rise of the Delta variant during the middle of the year. Best reflecting the impacts on the economy, hours worked are down by 3.9% since June, suggesting that market forecasts for a contraction in Q3 GDP of more than 3% are reasonable. Participation is down by around 1ppt from its recent peak, with many people classified as having exited the labour force. While the current fiscal supports do not maintain any formal employee/employer link as was the case in JobKeeper, labour shortages pre-Delta could mean that many businesses are holding onto staff through this period to enable a quick return to work once the lockdowns end.   

Preview: Labour Force Survey — August

Australia's Labour Force Survey for August is scheduled to be released by the ABS today at 11:30am (AEST). The spread of the Delta variant and associated lockdowns have hit the Australian economy hard, severely disrupting the momentum in the labour market. In today's report, employment is expected to show its largest monthly decline since last year's national lockdown, while the unemployment rate is likely to rise for the first time in nearly a year.    

As it stands | Labour Force Survey

Employment slowed sharply to a 2.2k rise in July weighed by New South Wales (-36.4k) as Sydney went into lockdown, though there were offsetting gains in the other states. However, the headline result was materially better than the market consensus for a 43.1k fall. This brought total employment to 13.156 million to be 1.2% above its pre-COVID level (full review here).   

After a very strong June quarter in which the average monthly gain in full-time employment was 61k, the segment recorded a 4.2k decline in July. Part-time employment lifted by 6.4k for the month, though it had fallen by 22.5k in June and has been weak in 2021. As of July, full-time employment was 1.7% above its pre-pandemic level compared to growth of 0.3% in the part-time segment.  

Australia's participation rate fell from 66.2% to 66% reflecting a material contraction in New South Wales (65.9% to 64.9%) as the Sydney lockdown saw many people exit the labour force. The weakness in participation drove a decline in the measured unemployment rate from 4.9% to 4.6% — its lowest since 2008. However, both underemployment (8.3% from 7.9%) and underutilisation (13% from 12.8%) increased reflecting the disruptions from lockdown.  

After falling heavily in June (-1.8%) with Victoria in lockdown, hours worked nationally were broadly flat (-0.2%) in July. Hours worked in New South Wales plunged by 7% but that was largely offset by the reopening in Victoria (9.7%) and rises in other states. While full-time hours held up in August (0.2%), part-time hours fell materially again in response to lockdowns; -2%m/m after a 3%m/m decline in July. 

Market expectations | Labour Force Survey

In August, the disruptions associated with Delta intensified, sending around 60% of the Australian population across Sydney, Melbourne and Brisbane into lockdown either throughout or for part of the survey reference period. The lockdown in the ACT was announced in the final few days of the period. 

The median estimate is for an 80k fall in employment in August around a significant spread of estimates from -300k to -50k. High-frequency ABS payrolls data shows the sharp deterioration in employment that occurred between mid July and mid August, with the index falling by 2.4% over the period. 

State payrolls show employment in New South Wales will fall heavily as the Sydney lockdown lengthened and tightened. Victoria's return to lockdown is likely to see it hand back the gain from last month. Though the lockdown in parts of the state was shorter than elsewhere, weakness in employment in Queensland can also be expected. 

The unemployment rate has been falling since November but that run looks to have come to an end in August, with the market expecting a rise from 4.6% to 5.0%. The wide range of estimates for the outcome — from 4.8% to 5.5% — reflects uncertainty over the classification of workers stood down due to lockdowns and the size of the impact on the participation rate. The current design of fiscal support payments (paid directly by the government rather than going through firms' payrolls as in JobKeeper) could mean that many workers are classified as unemployed but will resume work when lockdowns end. 

What to watch | Labour Force Survey

The hit to employment and the rise in the unemployment rate will take most of the headlines, but as has been the case throughout the pandemic the change in hours worked will give the clearest indication of the lockdown impacts on the economy. The participation rate is also a pivotal number to watch, not only for its influence on today's report but also in informing estimates of the extent of spare capacity that has accumulated from the Delta disruption.   

Record rise in Australian housing prices in Q2

Australian housing prices increased at their fastest quarterly pace on record according to data released by the ABS this morning. Nationally, the average capital city median price advanced by 6.7% in the June quarter, with the pace stepping up from the strong rates of growth seen in the previous two quarters. Properties were transacting at "an increasingly rapid rate" through the quarter as policy stimulus measures were driving demand at a time when stock on the market remained at low levels, the Bureau's Michelle Marquardt said. This has seen housing prices rise 16.8% since the national lockdown last year.  

Significant price rises were seen across the capital city markets in the June quarter, as the effects of policy stimulus from low interest rates, first home buyers incentives and the HomeBuilder scheme continued. Canberra posted its strongest quarterly rise on record (8.2%) while the uplift in Hobart prices (6.3%) was the highest going back to 2003. Prices in Melbourne (6.1%) advanced by their most since 2009 and gains of more than 5% were reported in the Brisbane and Adelaide markets, a pace last seen in 2007. Strong conditions in the Sydney market accelerated prices by 8.1% in the quarter, its strongest result in 6 years.  

Nationally, house prices (7.7%q/q, 19.8%Y/Y) extended their outperformance over the unit segment (4.3%q/q, 9.3%Y/Y), a trend that was in place ahead of 2020 and then accelerated by the onset of the pandemic. A stimulus response more targeted at detached housing, work from home arrangments, the desire for more space, and the closure of the international borders appear to be the factors behind this. The balance may be starting to shift in some markets, with unit prices lifting by more than house prices in Darwin and Hobart in Q2, while the recent increase in investor activity is likely to boost unit prices further, but the overall trend is still firmly in place. 

The return to lockdowns in the two major markets in Sydney and Melbourne appears to have slowed conditions there, with the pace of price rises in CoreLogic's series moderating over the past couple of months. That has weighed on price growth nationally, though it was still running at a strong pace at 1.5%m/m in August.  

Macro (Re)view (10/9) | Taper-like focus

While the RBA did not reverse its QE taper decision announced back in July at its meeting this week, its response to the Delta crisis was to put bond-buying on autopilot until the summer months when the economy is expected to be back on track. As last week's national accounts showed, momentum in the Australian economy remained strong through the June quarter, but the emergence of Delta subsequently led to an abrupt deterioration in conditions on surging caseloads and widespread lockdowns. While Governor Philip Lowe's decision statement reflected the Board's sanguine assessment of the situation, with accelerating vaccination rates behind its expectation that this should be a case of recovery delayed not derailed, policy has been recalibrated in the interim.

With QE purchases reaching their targeted $200bn level ahead of the meeting, the Board this week adhered to its commitment given in July to start tapering the weekly run rate from $5bn to $4bn. Some sections (including myself) had thought that a delay to the taper would be forthcoming, but with the Board also announcing that the timing for the next review would be pushed back from November to February, it should make little difference either way. Delaying the next review until "at least mid February 2022" from mid November previously rules out another taper until well after the reopenings are expected and there is more clarity over conditions. As discussed in the review of Tuesday's decision, my calculations point to additional bond-buying through this period of $11bn relative to what markets may have been expecting in the absence of the Delta shock, where another taper may have occurred in November. Given the resistance to maintaining purchases at the $5bn weekly rate, it seems to me that the recalibration delivered this week is the framework for how further setbacks will be dealt with should the need for more RBA support arise. Importantly, there remains no change to the RBA's forward guidance on rates with the conditions for sustainable inflation between the 2-3%Y/Y target band not expected to materialise before 2024.

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Offshore this week the ECB's policy meeting was the highlight event. The Governing Council announced that the frontloading of purchases in the Pandemic Emergency Purchase Programme (PEPP) would end, reducing from a "significantly higher pace" to a "moderately lower pace", while all other policy settings remained unchanged. Since the decision was taken in March to accelerate the pace of PEPP purchases amid a significant setback in the econmic recovery, monthly purchases had averaged around €80bn compared to around €60bn in the early months of the year. But with the reopening and recovery regaining momentum, media reports quoting ECB sources indicate purchases in the range of €60-70bn per month will be sufficient to maintain favourable financing conditions. This is not really a taper in the sense that the PEPP envelope remains at €1,850bn — in fact, purchases will be in line with the level seen in August (see chart) — while its withdrawal date for not before the end of March next year is also intact.

Chart of the week

Markets do not expect the PEPP to be extended beyond that date and therein lies the key issue. The updated ECB staff forecasts presented this week showed that while the growth trajectory in the economy is robust — GDP for 2021 was revised up to 5.0% from 4.6% ahead of growth of 4.6% (-0.1ppt) in 2022 and then 2.1% in 2023 (unchanged) — inflation is expected to remain well short of its newly reformulated 2% target over the medium-term horizon. In the near term, inflation for 2021 was revised up to 2.2% (+0.3ppt) reflecting price pressures associated with the reopening but those factors are expected to be transitory with the pace fading over the more relevant period for policy in 2022 to 1.7% (+0.2ppt) and 1.5% (+0.1ppt) in 2023. With the end of PEPP nearing and significant support still required to drive inflation towards target, the ECB will need to come up with a response. At this stage, markets think the most likely way forward is a repurposing of the ECB's other QE program — the APP — but purchases there are currently only running at €20bn per month. Significantly elevating purchases in the APP could potentially see the ECB pushing up against its self-imposed rules on debt holdings of its member countries (an issue the PEPP has avoided due to its flexibility), while it would face resistance from the hawkish sections on the Governing Council. With much to work through, President Christine Lagarde gave little away at the post-meeting press conference other than to say the December meeting would be the time for these debates.

Over in the US, implications for the growth outlook amid the impact of Delta remained in focus. Highlighting these concerns was the Federal Reserve's Beige Book which noted that activity had "downshifted slightly to a moderate pace in early July through August". Areas including restaurants and bars, tourism and travel were reported as having been impacted by Delta in most Fed districts, while the other factor weighing on growth related to supply constraints for materials and labour. Labour demand remains very strong as job openings rose to a new record high at 10.9 million in July and is well in excess of the level of unemployment (8.4 million), suggesting that skills miss-matches are likely to at least be part of the story. Supply constraints continue to be reflected in elevated producer prices, with the Y/Y rate on the PPI rising to its highest on record at 8.3% in August. Both goods (1.0%) and services (0.7%) recorded strong rises in the month, indicating ahead of next week's key CPI data that price pressures remain in the pipeline. 

RBA: Recovery delayed not derailed

The RBA Board concluded at today's meeting that the spread of the Delta variant and the associated lockdowns is a case of recovery delayed, not derailed for the Australian economy. However, since the Board last met, conditions have deteriorated significantly and that has prompted a recalibration of policy. While the Board confirmed that its weekly bond purchases will be tapered from $5bn to $4bn, it has essentially offset that announcement by pushing back the timing for the next review of the QE program from mid November to mid February. All other settings were left unchanged, with 0.1% targets retained on the cash rate and 3-year AGS yield. 

Back in August, the RBA's forecasts were for a contraction in Q3 GDP of "at least 1%" but in today's decision statement, Governor Philip Lowe noted the economy was now expected to "decline materially" and that the unemployment rate "will move higher over coming months". As a simple guide in highlighting the extent to which the situation has evolved, today's statement included 6 mentions of "Delta" whereas in August there were none. While conditions have deteriorated more sharply than earlier anticipated, the Board remains of the view that the setback will be temporary in nature. With vaccination rates accelerating, the RBA expects that some easing of restrictions will occur in the December quarter, setting in motion a rebound that it forecasts will see the economy return to its pre-Delta trajectory by the second half of next year. However, there are clear risks to that outlook with significant uncertainty around the timing and nature of reopenings, while it is less clear how quickly household spending will rebound on this occasion given the nation will be transitioning to living with the virus.

Clearly, between the setback to the economy in the near term and the uncertainty going forward, there was enough to encourage the Board to respond. While the Board again resisted reversing the tapering guidance it announced in July, a higher stock of purchases is now more likely. Consistently, the RBA states that it is the stock not the pace of purchases that is the more relevant consideration for policy. Under the July announcements, QE purchases were due to run at $4bn per week before coming under review in mid November. In the absence of the Delta disruptions, it is reasonable to think the pace would have been in line to be tapered further, to say $3bn per week. Under that scenario, today's announcements have effectively delayed a November taper. Based on my calculations, the effect this has on the stock will be an additional $11bn of purchases through to mid February.  

Governor Lowe notes that the QE program will continue to be reviewed "in light of economic conditions and the health situation", but given the resistance put up to reversing the taper at the past two meetings where there has been a solid case to do so, it seems unlikely that the pace of purchases will be increased from here. Today's decision can be seen as the template should any further setbacks arise. The final paragraph of Governor Lowe's statement concluded by reaffirming the forward guidance that rate hikes were not foreseen before 2024 with the RBA's inflation and employment objectives still a long way from being met.