Australian dwelling approvals slide to 11-year low in 2023

Australian dwelling approvals declined by 9.5% in December, more than reversing increases posted in October (8.3%) and November (0.3%). Although approvals rose by 5.3% over the final quarter of the year, their annual total for 2023 (162.2k) was the lowest in 11 years, reflecting legacy issues from the pandemic around supply constraints and rising interest rates. 

Dwelling approvals came down 9.5% from the prior month to 13.1k; unit approvals unwound to 4.6k (-22.4%m/m) after rising strongly through October-November, while house approvals softened to 8.5k (-0.6%m/m). Nonetheless, approvals increased over the final quarter of the year, up 5.3% (with units +11.9% and houses +1.6%) but remained well down on the cycle highs seen in the middle of 2021. 

Taking a step back, total approvals in 2023 came to 162.1k, their lowest annual outturn since 2012. Annual approvals came to their weakest since 2011 for units (60.8k) and retraced to a 10-year low for houses (101.4k). 

The RBA has raised rates by 4.25ppts since May 2022 and this has been a key factor behind the slide in dwelling approvals, tightening financing conditions for home builders and adding to margin pressures following substantial cost increases for labour and materials, reflecting supply constraints. These supply constraints have been binding, with the dwelling completion rate near its lowest in 10 years as of Q3. As a result the pipeline of homes under construction has backed up significantly over the past couple of years. Working through this pipeline of backlogged homes has been the focus of home builders, with approvals and new home starts falling as a consequence.    

This has all coincided with a rapid post-pandemic rebound in population growth, putting pressure on the existing housing stock. Housing prices have risen materially - up 10% in the capital cities over the year to January according to CoreLogic's report this morning (see below) - and vacancy rates have fallen to very low levels.  

Source: CoreLogic

Australian Q4 CPI 0.6%, 4.1%Y/Y

Australian inflation declined more sharply than expected into the end of 2023, opening the door to earlier RBA rate cuts. Headline inflation fell to 4.1% year-on-year - roughly half what it was at its peak in late 2022 (7.8%) - with core inflation at 4.2% now also well down from its highs near 7%. Global disinflationary impulses continue to flow through to Australia, while domestically-generated inflationary pressures have eased somewhat.  

Consumer Price Index — Q4 | By the numbers 

• Headline CPI slowed to 0.6% in the December quarter, below expectations for 0.8% and down from 1.2% in the previous quarter. In annual terms, headline inflation fell from 5.4% to 4.1% (vs 4.3% consensus).

• Underlying CPI averaged 0.8% in the quarter from 1.2% in Q3, coming in from 5.3% to 4.2% at an annual rate. 

• The key trimmed mean measure was 0.8%q/q (vs 0.9% exp) - down from 1.2%q/q in Q3 - with the annual pace falling to 4.2% from 5.1%. 

Consumer Price Index — Q4 | The details 

Australia's key inflation outcomes came in below market estimates in the December quarter, bringing forward expectations for RBA easing. The report aligned with my expectations for below-consensus outcomes, as discussed in my preview note. Disinflation accelerated into year-end overseas, and this was also the case in Australia. Headline inflation declined sharply from 1.2% in Q3 to 0.6% in Q4, resulting in the annual pace falling from 5.4% to 4.1%, a 2-year low. Meanwhile, the core (or trimmed mean) rate softened from 1.2% in the prior quarter to 0.8% in Q4, bringing the annual pace down to 4.2% - a low to Q1 2022 - from 5.1% previously. 

Key developments in the quarter included tradables prices falling 0.7% (1.5%Y/Y), with Australia playing catch-up to disinflationary impulses offshore. By contrast, non-tradables - inflation generated domestically - remains more elevated up another 1.3%q/q, though the annual pace (5.4%) has moved well past the peak, helped by services prices (4.6%) cooling to a low since Q3 2022.   

Several factors were behind the slowing in the quarterly inflation rate. Discounting through the Black Friday sales saw broad-based falls in durable goods prices, including furniture and furnishings (-3.5%), household appliances (-3%) and recreational goods (-2.4%). Clothing and footwear prices were limited to a 0.5%q/q rise, as Black Friday sales moderated the effect of higher prices for in-demand summer stock. 

Fuel prices surprised falling by just 0.2%q/q - the monthly CPI series had pointed to a much larger fall - but this was still a key driver of lower inflation, accounting for 0.35ppt of the decline in the quarterly CPI rate from Q3.

Government measures providing cost-of-living relief saw significant reductions in inflation for rents (0.9% from 2.2%) and utilities (0.6% from 3.6%), the latter driven by rebates on electricity bills (still up 6.9%Y/Y). 

In other welcome news for households, prices fell in key items of the grocery basket. This was seen in declines for fruit and vegetables (-1.2%) and meat and seafood (-1.2%). Meanwhile, pharmaceuticals fell (-1.7%) through PBS subsidies. 

Despite inflation easing in Q4, cost-of-living pressures were still rising in some areas. Pushing up on inflation in the quarter were things such as insurance (3.8%q/q, 16.2%Y/Y) and household services, including child care (3.2%), hairdressing (1.7%), and vehicle (1.4%) and home maintenance services (1.1%). 

Consumer Price Index — Q4 | Insights 

Australia's inflationary impulse cooled materially over 2023, accelerating in the final quarter. At 4.1% in headline terms and 4.2% on a core basis, these outcomes are below the 4.5% pace forecast by the RBA. The RBA will update its forecasts for the February meeting (5-6), which will likely now see its inflation outlook revised lower. Following today's report, markets see the RBA starting to cut rates in Q2 from Q3 previously.   

Preview: Q4 CPI

Australia's December quarter inflation report is due from the ABS at 11:30am (AEDT) today. After surprising to the upside in Q3, inflation is expected to have slowed into year-end. Expectations going into today's report are for both headline and core inflation to decline to 4.3%, slightly below the RBA's forecasts. Current pricing implies that markets see the RBA starting to cut rates later this year in Q3, but this could shift forward to Q2 if the key outcomes today come in below expectations, a plausible scenario in my assessment. 

A recap: Inflation surprised on the upside in the September quarter

Australian inflation continued to decline in the September quarter but by less than expected. The RBA subsequently hiked the cash rate by 25bps to 4.35% at the November meeting. Headline CPI was 1.2% quarter-on-quarter (vs 1.1% expected), declining from 6% to 5.4% (vs 5.3%) in annual terms. The trimmed mean - or key measure of core inflation - also came in at 1.2%q/q (vs 1%), resulting in the annual rate slowing from 5.9% to 5.2% (vs 5%). 

After peaking in late 2022 at 7.8%, headline inflation declined through 2023 as price pressures in new home building, durable goods and food eased. But inflation continues to remain well above the RBA's 2-3% target band, with a range of household services, utilities and rents contributing strongly to the CPI. 

Global factors including slowing demand conditions and an easing of supply chain pressures have largely driven the decline in Australian inflation. Reflecting this, tradables inflation fell from 4.4% to 3.7% year-on-year in the September quarter. By contrast, domestic price pressures remain elevated, with non-tradables inflation easing only marginally from 6.9% to 6.2% year-on-year. This captures the effects of price rises in items such as insurance, electricity, rent and household services. 

Inflation is expected to have slowed materially into year-end... 

Going into today's report, headline CPI is expected to print at 0.8%q/q and 4.3%Y/Y, with the trimmed mean estimated at 0.9%q/q and 4.3%Y/Y. These estimates imply that inflation is expected to fall below the 4.5%Y/Y pace forecast by the RBA on both a headline and trimmed mean basis. 

... with potential downside risk 

In my assessment, the risks are skewed to the downside of these consensus forecasts. This assessment is partly based on observations from overseas where disinflation accelerated into year-end in many countries. It also takes into consideration the recent monthly CPI prints. The 3-month change in the headline CPI index to November was 0.6%; as the chart below shows, this provides a reliable lead indicator for the quarterly inflation rate. 

The monthly CPI reports for October and November have also been useful in identifying the key price movements that occured during the final quarter of the year. Government measures to provide cost of living support have been instrumental in limiting inflation in rents and electricity bills. On the back of declining wholesale prices, fuel prices nationally look to be down in the order of 3-4% since the end of Q3. 

Outside of these factors, today's report will fully capture the discounting associated with Black Friday sales across a range of durable goods items. Although the consensus forecasts take this into account, there was limited data in the November series to gauge the Black Friday effect, so this is another potential source of downside risk. 

Australian retail sales unwind post Black Friday

Australian retail sales declined by 2.7% in December (vs -2% consensus) as spending pulled back following the Black Friday sales in the prior month. The Bureau revised the surge in November sales down from 2% to 1.6%, but that is still the fastest month-on-month lift in 2 years. Retail spending cooled materially over 2023 - annual growth has slowed to 0.8% from a 7.6% pace 12 months ago - reflecting cost-of-living pressures and the rebalancing of spending patterns post the pandemic running its course, rotating from goods to services. 

The decline in retail sales following the Black Friday sales was larger in 2023 than in recent years. December sales fell by 2.7% in 2023 compared to declines of 1.3% in 2022 and 1.4% in 2021 and 2020. However, it also needs to be considered that Black Friday in 2023 gained significant traction with households; sales surged by 1.6% in November, posting their fastest increase in 24 months. 

Although momentum in retail spending is weak - quarterly sales lifted by just 0.5% - the immediate bounce Black Friday was able to generate is an indication that households - particularly those with excess savings - can still be encouraged to spend despite the pressures they are facing. To this point, the ABS noted in today's release that retailers reported that conditions picked up as discounting returned in the lead-up to Christmas and through the Boxing Day sales. 

Following a sharp 2.6% rise in November, spending in the discretionary categories fell by 4.5% in December, driving the unwind in retail sales. The categories that saw their strongest increases through Black Friday posted the largest declines in December: household goods -8.5%m/m (from 6.5% in November); department stores -8.1% (from 4.1%); and clothing and footwear -5.7% (from 2.2%). Cafes and restaurants saw clear a slowdown into year-end, declining 1.1% in December to be down for the 4th month in succession.    

As mentioned, quarterly sales lifted by 0.5% in Q4. That result is in line with Q3, which in inflation adjusted or volume terms equated to a 0.2% rise. The ABS will publish volume and price data for Q4 in a more detailed release next week.

Macro (Re)view (26/1) | US soft landing on track

Data confirming the US economy is on track for a soft landing remains the dominant theme in markets and sets the scene going into next week's Fed meeting. GDP growth in Q4 was a solid 0.8%q/q, driven by a 0.5ppt contribution from household spending. Growth through the year was 3.1%, accelerating from a 0.7% pace 12 months ago. This has been achieved alongside a substantial slowing in inflation. The Fed's preferred core PCE deflator printed at 2.9%Y/Y in December, a low back to March 2021 and well down from its 5.6% peak in early 2022. In both 3-month (1.5%) and 6-month annualised terms (1.9%), core inflation looks increasingly likely to be coming in below the Fed's 2% target by mid year.

The PBOC announcing a forthcoming cut to banks' reserve requirements to free up liquidity and news the authorities are considering measures to bolster its equity markets drove Chinese and HK equities to their first weekly gains this year. Elsewhere in the region, the Bank of Japan continued to maintain its existing settings (key rate -0.1%, 10-year yield target 0%), but markets sense policy normalisation is close, potentially starting in April. This was informed by the BoJ's Outlook statement that noted the likelihood of sustainability meeting its 2% inflation mandate had "continued to gradually rise". 

The ECB's policy meeting was uneventual; its key rates (MLF 4.75%, MRO 4.5% and DF 4%) and guidance around data dependency dictating upcoming decisions were all left unchanged. Overall, the ECB is in the position of managing its way to the point where it starts cutting rates. In the post-meeting press conference, ECB President Christine set about managing those expectations, highlighting the importance of waiting for information from wage negotiations taking place through Q1, a key factor that will shape its inflation outlook. President Lagarde said discussing policy easing now was premature but did not resile from her comments at Davos last week that rate cuts by the (northern hemisphere) summer were a likely scenario. But market pricing following Thursday's meeting has seen April firm as the expected timing for the start of the cutting cycle. The difference in timing reflects that the ECB is more cautious about the inflation outlook than the markets, with President Lagarde citing the Middle East tensions as a potential source of reigniting price pressures.  

Domestically, much of the focus was on the Government's amendments to the previously legislated Stage 3 tax cuts. According to Treasury modelling, the revamp broadens the scope of tax relief from 10.8 million to 13.6 million people at the same budgetary impact. In effect, the revamp redistributes around half of the tax relief that was to flow to income earners in the highest tax bracket to low- and middle-income earners. Treasury's analysis also concludes that the amendments do not add to inflationary pressures and support labour supply, but these elements continue to be strongly debated in local dispatches. 

Macro (Re)view (19/1) | New year; familiar themes

Although it has been a shaky start to the new year across markets, equities in the US and Japan have picked up where they left off in 2023. The S&P 500 closed the week at a new record high while the Nikkei 225 is up 7.5% year to date. Upside inflation surprises and officials at the Fed and ECB pushing back on aggressive pricing for policy easing have driven higher bond yields. This and a range of other geopolitical and economic factors have seen the US dollar find renewed strength. 

The incoming data continues to reaffirm that the US economy remains on track for a soft landing, likely delaying the timing of Fed rate cuts amid ongoing weakness in China and Europe. China Q4 GDP data printed close to expectations at  1%q/q, 5.2%Y/Y; however, investment sentiment remains very negative. The PBOC left a key lending rate on hold this week, while there were further signs of deterioration in the property development sector. Property investment is down 9.6% through the year to December and new home prices recorded their steepest month-on-month fall (-0.4%) since 2015. 

Speaking at the Brookings Institute, Fed Governor Waller indicated that the strength of the US economy did not warrant the sort of policy easing seen in previous cycles. Market expectations for significant rate cuts in 2024 were heavily influenced by comments Waller made back in November that outlined the case for the Fed to cut rates alongside falling (but still above target) inflation. Waller noted the importance of the upcoming January CPI data (out mid-February) as the report will contain potentially key revisions to the 2023 readings. Atlanta Fed President Bostic also delivered balanced remarks, saying that rate cuts could start in Q3 but earlier easing risked spurring demand and inflation pressures. Demand in the US is already robust, highlighted by a strong rise in December retail sales lifting 0.6% month-on-month (vs 0.4%) and the control group accelerating 0.8%m/m (vs 0.2%). 

As much as 150bps of ECB rate cuts are priced for 2024, but officials from the central bank have been united in attempting to dampen those expectations in recent weeks. Ahead of next week's policy meeting, ECB President Lagarde spoke at the Davos forum and highlighted that while rate cuts may be forthcoming by mid-year, rate-cut pricing risked undoing some of the progress on inflation. Upsides surprises in the UK's December inflation report would not have gone unnoticed at the ECB. 12-month headline CPI in the UK lifted from 3.9% to 4% (vs 3.8% expected), though an unchanged core rate at 5.1% and firmer services inflation at 6.4% (from 6.3%) were the more significant developments. Markets took away from this that central banks will continue to encounter bumps on the road ahead to bringing inflation back to their respective targets. 

In Australia, the very weak December Labour Force Survey published this week has largely been set aside, appearing to be attributable to seasonal volatility. Employment surprised all concerned falling by a net 65.1k - its largest fall since the pandemic lockdowns in 2021 - after very strong gains in October (44.2k) and November (72.6k). Despite this, the unemployment rate remained at 3.9% due to a very large fall in the participation rate to 66.8% from a record high in November (67.3%). As discussed in my review of the report, very little should be read into December's outcomes; overall, the Australian labour market remains robust with the unemployment rate below 4% and participation around record highs. 

Australian employment -65.1k in December; unemployment rate 3.9%

The December Labour Force Survey reported the largest decline in Australian employment since the pandemic lockdowns of 2021, a highly surprising outcome in contrast to recent strength. The unemployment rate held at 3.9% due to a decline in the participation rate from record highs. The labour market eased over the course of 2023 but still remains in robust shape. Further RBA tightening was already considered an unlikely prospect before today's report.   

By the numbers | December 

• Employment fell by a net 65.1k in December, a significant surprise versus the 15k consensus and coming in materially worse than even the most pessimistic forecast (-35k). November employment was revised up to a 72.6k rise from 61.5k. 
• The national unemployment rate was unchanged at 3.9%, while underemployment (6.5%) and underutilisation (10.4%) were also steady. 

• Labour force participation declined sharply from a record high of 67.3% in November (revised from 67.2%) to 66.8% in December. 

• Hours worked contracted 0.5% month-on-month, with hours worked in November revised from a flat reading to a 0.2% decline.

The details | December 

A series of very weak outcomes in today's report came as a surprise. Employment was reported to have declined by a net 65.1k, making this the largest one-month fall since the delta-wave lockdowns back in 2021. This is very much against the run of play; as discussed in my preview, employment was solid in Q3 (72.4k) and then accelerated over October (44.2k) and November (72.6k), with the November outcome revised 11.1k higher in today's report. The ABS's payrolls data also indicated employment continued to rise into year-end. 

The ABS noted that the December decline came after "larger than usual" gains in October and November, but the change still looks highly extreme. The volatility was even more accentuated in the composition of employment: full time employment - after surging in November (57k) - fell by 106.6k, its largest decline since the onset of the pandemic, while the part time segment at 41.4k rose by its most since September. 

Despite the large fall in employment (-65.1k), there was no change to the unemployment rate (3.9%); this was due to a significant fall in the participation rate from 67.3% to 66.8%, equating to a 65.9k decline in the labour force. Meanwhile, the underemployment rate (6.5%) and total labour force underutilisation (10.4%) were also unchanged.

The other weak aspect of the report was hours worked falling by 0.5% in the month, easing growth over the year from 1.5% to 1.2%. Hours worked by those employed full time fell by 0.8%m/m, by contrast, part time hours lifted by 0.7%m/m. Hours worked fell by 0.4% in Q4 and were down by 1.3% through the back half of the year. My interpretation has been that this weakness in hours worked reflects the adjustment to the backdrop of slowing economic growth, with population growth continuing to support employment. The fall in employment in today's report does not change that view.  

In summary | December 

There are lots of question marks around today's report, so it is not one to read too much into. In recent months, momentum in employment has been solid and I anticipate that the decline reported for December will reverse over the next month or two. The level of tightness in the labour market eased through 2023, but conditions are still robust with the unemployment rate below 4% and the participation rate around record highs.  

Preview: Labour Force Survey — December

Australia's Labour Force Survey for December is due at 11:30am (AEDT) today. Labour market tightness eased through 2023, though employment growth has remained strong and has accelerated into year-end. A modest expectation for employment (15k) could be exceeded while the unemployment rate is forecast to remain at 3.9%. 

A recap: Employment growth accelerates, but the unemployment rate rises 

Employment increased at its fastest pace in several months rising by 61.5k in November, well above the expected outcome of 11.5k. This came on the back of a resurgence in full time employment (57k), with part time employment lifting modestly (4.5k). Despite a downward revision in October from 55k to 42.7k, employment is still up by a little more than 100k over the past couple of months, an acceleration from an increase of 76.1k in Q3. 

 

Australia's strong pace of population growth has been a factor supporting employment through additional demand. It has also boosted the supply side of the labour market, reflected in the participation rate reaching a new record high in November at 67.2%. But the balance between labour demand and supply has recently put upward pressure on the unemployment rate, which lifted from 3.8% to 3.9% in November, its highest since May 2022 and up from cycle lows of 3.4%. The underemployment rate (6.5%) and the labour force underutilisation rate (10.4%) have also eased after reaching their lows in late 2022 to early 2023.

After posting a solid 0.4% rise in the prior month, hours worked were unable to advance further coming in flat in November. Growth in hours worked has slowed over the past year (1.6%) and is well below the pace of employment growth (3.2%). This likely reflects firms adjusting to slower economic growth by reducing hours rather than employment. 

Employment is expected to moderate in December...   

In today's report, the consensus forecast is for employment to slow to a 15k rise in December, though the range of estimates is very wide (35k to -10k). Unemployment is anticipated to hold at 3.9%, based on an unchanged participation rate into year-end.   

... though markets have underestimated its resilience

In 3 of the past 4 months, employment has outperformed expectations, and by a material margin on most of those occasions. The interest in today's report is if there is another upside surprise; the recent trend suggests this is likely, while the ABS's payrolls series supports this view after the index was reported in yesterday's release to have risen by 0.5% for the month to mid-December. My interpretation has been that employment is being bolstered by population growth, remaining resilient to the backdrop of a slowing economy. 

Australian housing finance extends rebound

The value of Australian housing finance commitments lifted by 1% month-on-month in November, extending the rebound from cycle lows in early 2023 to more than 21%. Commitments have climbed through 2023 despite the impact of RBA rate hikes amid strong demand for housing associated with population growth. Much of this demand has been concentrated in the existing housing stock, with the run-rate of new housing completions slowing to decade lows due to capacity constraints and other pressures.    

Housing finance commitments increased for the fourth month in succession rising by 1% in November. This was the slowest increase in that sequence; however, it followed a 7.2% surge in October. New commitments totalled $27.6bn for the month, up 21.3% on the cycle low seen in February 2023 ($22.7bn). 

In the owner-occupier segment, lending lifted by 0.5%m/m to $17.9bn, a rise of 18.5% from the early 2023 low ($15bn). The upgrader segment was little changed in November (-0.1%) but has been a major driver of the upswing, supported by rising housing prices. CoreLogic recently reported that the median capital city housing price increased by around 9% over the year to December. Construction-related lending (1.4%m/m) has lifted over recent months, though it remains at a very low level ($2.6bn), while loan volumes (4.4k) are down some 66% on cycle highs. 

Activity in the first home buyer segment continues to lift. A 2.8% rise in lending to $5.3bn was matched with a 3.5% rise in loan volumes to 10.4k.  

Investor lending rose for the 8th month in succession with a 1.9% lift coming through for November. This took the value of lending to the segment to $9.7bn, up 26.5% on the recent low from February ($7.7bn). 

 

Refinancing was broadly stable (0.7%) at $17.5bn in the month. The level is down considerably over the past 12 months (-11.9%) after many borrowers refinanced in 2022 as the RBA hiking commenced. Over the year, owner-occupier refinancing is down 15.5% (and -19.3% in volume terms) while the investor segment by comparison has declined modestly (-3.9%).   

Australia's trade surplus widens to 8-month high

Australia's goods trade surplus rebounded to an 8-month high at $11.4bn in November (vs $7.3bn expected), widening sharply from $7.7bn in October. The upside surprise in the trade surplus was driven mostly by imports posting their largest month-on-month fall (-7.9%) since February-23, though a solid rise in exports (1.7%) was also a factor. The November result came against the trend seen through much of 2023, with the surplus narrowing as declining commodity prices weighed on exports while import spending held up near record highs. 

The trade surplus at $11.4bn printed at its widest since March and is up substantially from a 2½-year low ($6.1bn) seen just two months earlier. The 3-month average for the trade surplus increased to $8.4bn, lifting from a low of $7.9bn over the past couple of months. 

The value of the nation's exports lifted by 1.7% in November to A$46.3bn. But export values are down 8.2% over the year and are 16.4% below the June 2022 peak ($55.4bn). This decline has been driven by a retracement in the value of coal exports, which halved from a high of $14.9bn in June-22 to $7.5bn in August-23. In November, however, coal exports bounced 6.8% (to $8.2bn), while iron ore exports also lifted by 3.1% ($16.8bn), driving the non-rural goods category to a 2.4% month-on-month rise. Rural goods exports were little changed ($5.9bn) rising by just 0.3% in the month.  

Import spending saw its sharpest fall in 9 months declining by 7.9% in November to A$34.9bn, also a 9-month low. The key drivers in this decline were: consumption goods (-14%), led by a sharp drop in the arrival of new vehicles into the country (-26%), and intermediate goods (-3.8%) as declining global oil prices saw the value of fuel imports retrace at their fastest pace in 11 months (-10.2%). Further, capital goods imports also contracted (-2.8%); however, the value of these imports remains up 10.5% on the year. This partly reflects inflationary effects, though the Q3 National Accounts reported inflation-adjusted business investment in equipment and machinery rose strongly (8.8%) through the year.