Australian housing finance rises 1.4% in Q4

Australian mortgage lending lifted by 1.4% across the final quarter of 2024 to $87.2bn, its highest level since Q1 2022 on the eve of the RBA's tightening cycle. Rate hikes saw lending slow dramatically through 2022 and 2023, but the tide turned in 2024 as supply/demand pressures emerged as the driving factor in the housing market. The housing finance series has returned today following a revamp from the ABS. The series has shifted from a monthly to a quarterly frequency with definitional changes and revised seasonal adjustment processes. Time will be needed to gain a more considered feel for the new format and its intricacies. 

(Source: ABS)  

The 1.4% rise in lending commitments in Q4 ($87.2bn) continued the upswing that emerged in late 2023/early 2024 (see chart below). However, the pace slowed significantly from the gains seen through Q2 (9.2%) and Q3 (5.3%). While lending to owner-occupiers increased by 4.2% ($54.8bn) - gains came through for upgraders (3.5%) and first home buyers (1.5%) - the investor segment saw a 2.9% fall in lending ($32.4bn), its first decline since Q1 2023.    

(ABS Chart) 

Lending commitments rose despite underlying loan volumes falling slightly in Q4 by 0.4% to 132.1k. Loan volumes are 16% off the 2021 cycle highs (157.2k) but are up 20% from the recent low in Q1 2023 (110k) after RBA rate hikes had taken hold (see chart below). The 4.2% rise in owner-occupier lending was underpinned by a 2.2% lift in loan volumes (upgraders 1.2% and first home buyers 1.3%), which at 83.2k reached their highest level in more than 2 years. By contrast, the 2.9% pullback in investor lending was matched with a 4.5% contraction in loan volumes (48.9k). 

(ABS Chart)

Macro (Re)view (7/2) | Tariff uncertainty besets markets

The on-again, off-again headlines around tariffs from the Trump administration saw markets trade through elevated uncertainty this week. The US dollar continued to perform - except against the Yen on signs the BoJ is preparing to hike rates again - with an added boost coming from a solid payrolls report. Treasury yields repriced higher at the front end of the curve, but the longer end was lower this week as markets digested the quarterly refunding announcement favourably and Treasury Secretary Bessent said Trump wants a lower 10-year yield rather than calling for Fed rate cuts. In the UK, delivery of the BoE's expected 25bps rate cut came with a dovish tilt (more below). Meanwhile, an ECB research paper suggested its estimate of the neutral policy rate was in the 1.75-2.25% range (depo rate is currently 2.75%), but VP of the ECB de Guindos downplayed the importance of the concept from a policymaking perspective.   

January payrolls were consistent with an analysis of continuing strength in the US labour market. Although the headline figure at 143k was light relative to the 175k consensus estimate, backward revisions boosted payrolls for the prior two months by a net 100k. The BLS did not identify any discernible impacts from the Southern California fires. Meanwhile, the unemployment rate tightened from 4.1% to 4.0% (alongside an uptick to 62.6% participation) and average hourly earnings printed at 4.1%yr (with upward revisions to prior months) - hawkish elements of the report that markets keyed off during Friday trade. The report (unsurprisingly) clearly carried more weight with markets than other data through the week that was on the soft side of expectations: ISM services activity gauge slowing from 54 to 52.8 in January (vs 54.3 expected), and job openings falling from 8.2 million to 7.6 million in January (vs 8mn).  

The Bank of England cut Bank Rate by 25bps to 4.5% as expected, but the 7-2 vote split was the most dovish analysis from the Monetary Policy Committee in the current easing cycle. All 9 MPC members voted to cut this week, with the 2 dissenting votes being cast by members Dhingra and Mann for a larger 50bps cut - a surprising call from the latter after opposing both of the previous rate cuts voted through in August (5 cut to 4 hold) and November (8 cut to 1 hold) last year. This week's decision maintains the sequence of quarterly rate cuts, occurring at meetings where the BoE has published updated economic forecasts. Markets expect this to remain the playbook through the remainder of 2025, a nod to the BoE sticking with its message of 'gradual' rate cuts being appropriate. This sees almost 3 additional rate cuts priced into the curve. 

In the BoE's latest Monetary Policy Report, the key changes made to the Bank's forecasts were for higher inflation and slower growth. Despite a conditioning assumption of higher market interest rates, headline inflation was called up 40bps on the previous set of forecasts to 2.8% in 2025 and 3.0% in 2026 before slowing to 2.3% in 2027 (from 2.1%). This became the main subject of the post-meeting press conference where Governor Bailey (joined by Lombardelli and Ramsden) explained that higher inflation was forecast due to energy price resets and government-regulated prices - factors that were not expected to generate second-round effects on prices and wages that would require the BoE to act. That sees the BoE retaining enough confidence in the disinflationary process in the UK to reduce the restrictiveness of monetary policy, supporting the economy amid a weaker growth outlook; GDP growth for 2025 was cut by 1ppt to just 0.4% before rebounding to 1.5% in 2026 (from 1.6%). 

Domestically, solid retail sales data has not shifted the dial with markets as a February RBA rate cut remains priced in. Cyber Monday limited the usual pullback post the November Black Friday sales to just a -0.1% decline in December (vs -0.8% expected). In a sign that cost-of-living subsidies and the Stage 3 tax cuts are starting to lift the malaise for households, retail sales lifted by 1.4% across the quarter, with a 1.0% rise in underlying volume demand the driving factor. For more analysis see my review here. Other notable developments in Australia this week included a modest 0.7% increase in dwelling approvals in December (see here), while the trade surplus narrowed sharply to close out 2024 at $5.1bn as imports (5.9%) accelerated at their fastest pace in 15 months (see here). 

Australia's trade surplus narrows to $5.1bn in December

The fastest rise in import spending (5.9%) in 15 months saw Australia's trade surplus narrow sharply from $6.8bn in November to $5.1bn in December, coming in well below expectations ($6.7bn). The trade surplus came under material compression over 2024 as lower commodity prices weighed on exports (-2.9%yr) while a weaker Australian dollar and resilient demand contributed to higher import spending (9.2%yr).

December's trade surplus was a relatively modest $5.1bn after widening in November to $6.8bn, a high since February 2024. That narrowing reflects the broader theme that played out over 2024: the trade surplus averaged $5.7bn per month in 2024, well below the elevated levels of $13.5bn in 2022 and $10.4bn in 2023.  

Import spending has held at elevated levels over recent years. Domestic demand has remained resilient well past the pandemic rebound; inflation has slowed but price levels have remained high; and the Australian dollar has weakened. 

In the most recent month, imports lifted by 5.9% - their fastest month-on-month rise since September 2023 - led by increases in capital (10.6%) and intermediate goods (3.8%). Over the final quarter of the year, imports rose by 1.1% to $38.9bn 

Exports have been in decline since peaking in mid-2022, a retracement in commodity prices the driving factor as global growth slowed post the pandemic recovery. However, the momentum was starting to turn into year-end as exports strung together their third consecutive increase following a 1.1% rise in December. The key movements were: non-rural goods +2.3%m/m (with iron ore +3.8%) and rural goods +9.1%m/m. For the quarter, exports advanced by 2.5% - just the second quarter-on-quarter increase since the mid-2022 peaks. Helping to underpin that outcome was non-monetary gold (18.7%q/q) as the price of the commodity rose to record highs amid global economic uncertainty and increased market volatility. Meanwhile, rural goods also surged during the quarter rising by 10%. 

Australian dwelling approvals rise 0.7% in December

Australian dwelling approvals ended 2024 slightly missing estimates with a 0.7% rise in December (vs 1.0% expected); however, this was their 4th rise in the past 6 months. Approvals trended higher over the back half of the year from near cycle lows in the first half as approvals in the higher-density segment accelerated. By contrast, house approvals lost momentum into year-end. Overall, approvals remain at low levels as higher interest rates and capacity pressures continue to weigh on home building activity.

A 0.7% lift in December (to 15.1k) saw headline approvals total 45.9k for the final quarter of 2024, up 4.5% on Q3 and their highest quarterly figure in 2 years. This was also the third consecutive quarterly rise in approvals following gains of 4.8% in Q2 and 5.9% in Q3. Key to that momentum has been the unit or higher-density segment; approvals in the segment rose in December (6%) to be up by 21.1% across the quarter (18.6k). That was after an 11.7% rise in Q3 and a modest 1.5% lift in Q2. House approvals were down for the third month running in December (-2.8%), declining by 4.4% for the quarter. That was a clear weakening from the gains seen in Q2 (6.5%) and Q3 (3.0%). 

   

The underlying detail shows that the lift in higher-density approvals has been driven by the high-rise category. In the latest quarter, high-rise approvals surged by 28.4%, which compares to smaller gains in the low-rise (11.2%) and townhouse categories (2.1%). 

Looking further into the numbers, the acceleration in high-rise approvals looks to be led by the major two capital cities of Sydney and Melbourne, with Brisbane contributing to a lesser extent. 

Alteration approvals were down for the second time in the past 3 months falling 3.7% in December to $1.1bn - still at a very elevated level. For Q4, the value of work approved declined by 1.9%, the first quarterly fall seen since Q1 2023. 

Australian retail sales -0.1% in December; Q4 volumes 1.0%

Australian retail sales declined by 0.1% in December, a much more modest pullback than expected (-0.8%) post the November Black Friday sales as the timing of Cyber Monday sales fell early in the new month. Retail spending lifted by a solid 1.4% across the final quarter of 2024 - a sign that cost-of-living subsidies and the Stage 3 tax cuts are working - driven by the strongest lift in underlying volume demand (1.0%) since Q1 2022. Discounting during the various sales events saw retail price growth ease to 0.4% in Q4, the slowest quarterly increase since the comparable period in 2023. 

December sales declined by a modest 0.1% on the prior month that was boosted by Black Friday sales (0.7%). In recent years (since the pandemic particularly), sales in December have typically seen sizeable declines (2020 -0.9%; 2021 -0.7%; 2022 -0.6%; and 2023 -1.5%) as households have brought forward purchases to November to take advantage of Black Friday discounting. This effect, though still evident, was much more modest in 2024. The ABS noted that Cyber Monday sales occurred in early December, underpinning a 1.6% rise in household goods (including electronics and furniture) that largely offset post-Black Friday declines in other categories. The chart below highlights this contrast in the profile of sales growth in December in 2024 compared with 2023 when all categories declined.  

Despite weakening in December, retail sales still lifted by 1.4% in Q4, their sharpest quarter-to-quarter increase since Q3 2022. Notably, this was demand-driven with retail volumes advancing by 1.0%, the strongest outcome back to Q1 2022. Equally significant, volumes on a per capita basis (adjusted for population growth) picked up by 0.5% in the quarter - the first rise in the series in 9 quarters. Price discounting through Black Friday and Cyber Monday, as well as a material moderation in food inflation (1.2% to 0.4%), saw the retail price deflator ease to 0.4% in Q4. 

The profile of retail volumes shows that discretionary categories led the way - volumes excluding basic food advanced by 1.5%q/q compared to the 1.0% lift in headline volumes. Household goods were the major driver (3.3%) with department stores (0.2%) and clothing and footwear 0%) subdued. Meanwhile, cafes and restaurants posted their strongest rise (1.2%) in more than 2 years. Volumes in basic food were up modestly (0.2%) coming off 3 consecutive quarterly declines.      

Macro (Re)view (31/1) | Navigating turbulence

Cross-asset volatility picked up as markets were dealt range of crosscurrents this week; elevated US tech valuations were called into question; President Trump vowed to impose tariffs on China, Canada and Mexico from February 1; while central bank policy divergence continued - the Fed hitting the pause button, but the BoC, Riksbank and ECB (discussed later) all cut by 25bps. Meanwhile, in Australia, an encouraging Q4 inflation report should allow the RBA to cut in February.    

A well-telegraphed pause in the Fed's cutting cycle saw rates left in the 4.25-4.5% range. With minimal changes in the decision statement and in the messaging from Chair Powell at the post-meeting press conference, pricing for around 50bps of further easing was maintained. The broad assessment of the Fed is that with 100bps of easing delivered since last September, rates are now well calibrated given the prevailing conditions and the policy uncertainty around the Trump administration. 

Although GDP figures for Q4 surprised to the downside of estimates at 0.6% quarter-on-quarter (2.5%Y/Y), US growth remains 'solid' in the view of the Fed while the unemployment rate has 'stabilised at a low level'. Inflation was characterised as still 'somewhat elevated' - its preferred core PCE deflator gauge came in at an unchanged 2.8%Y/Y pace in December - though the Fed remains confident that a return to the 2% target is on the horizon. A less dovish Fed through 2025 has kept US rates elevated and the dollar supported following their moves higher coming out of President Trump's election victory. 

The ECB continues to cut interest rates, announcing a further 25bps reduction across its policy structure. This lowered the key depo rate to 2.75%, falling since the middle of last year from cycle tights of 4%. Key assessments from the Governing Council at the previous meeting remained unchanged this week: disinflation is 'well on track' and risks to growth 'tilted to the downside' - not least due to impending tariffs that President Trump has said will be forthcoming.  

These dynamics are set to keep the ECB in easing mode through 2025. Markets are priced for rates to fall to 2% by year-end, implying an additional 75bps of cuts. That is one of the factors that has weakened the EUR to late 2022 lows just above parity to the USD. Should the downside risks to growth in the euro area materialise, the ECB may well cut beyond a neutral setting for rates into more expansionary levels. At the post-meeting press conference, ECB President Lagarde repeated familiar lines of data dependency and policy not being on a pre-set course. But some nuance was introduced with Lagarde telling markets that the ECB would next week publish new estimates of neutral policy settings.   

Continued disinflationary progress reported in Australia's pivotal Q4 CPI release has an RBA rate cut in February priced as a done deal, with a total of around 100bps of cuts now priced into the curve. Key outturns for headline CPI at 0.2%q/q and 2.4%Y/Y (from 2.8%) and core or trimmed mean CPI at 0.5%q/q - slowest clip in 2½ years - and 3.2%Y/Y (from 3.5%) all surprised to the downside of market expectations, and, more importantly, printed below the RBA's forecasts (2.6%Y/Y headline and 3.4%Y/Y core). My detailed report covers the release in full here, but the main takeaway is that the disinflationary process is showing signs of broadening out beyond the effects of cost-of-living subsidies. The dual mandate of the RBA has made preserving the strong labour market a priority for the Board. With inflation now in around the 2-3% target band, a February cut looks straightforward. 

Australian Q4 CPI 0.2%, 2.4%Y/Y

A cooler-than-expected Australian CPI report for Q4 has firmed pricing for an RBA rate cut in February to a greater than 90% probability, with almost 100bps of easing being discounted through the cycle. After essentially stalling over the first half of 2024, the disinflationary process in Australia was revived by government rebates in Q3. That momentum has subsequently continued into year-end, if anything broadening to other areas of the CPI basket - including services. Annual inflation is now at 3-year lows at 2.4% headline and 3.2% on trimmed mean (or core) terms and is below the RBA's most recent set of forecasts (2.6% headline and 3.4% core).

Headline inflation in the December quarter came in at 0.2%, below expectations for a 0.3% outcome but in line with its pace from Q3. Annual inflation slowed from 2.8% to 2.4% (vs 2.5% expected), a low since Q1 2021. Core or trimmed mean inflation printed its softest quarter-on-quarter rise in 2½ years at 0.5%, surprising to the downside of the 0.6% expected figure. This eased the year-on-year pace to its slowest since Q4 2021 at 3.2% (vs 3.3%), down from 3.5%. 

The situation should not be overcomplicated. The RBA raised the cash rate to 4.35% in response to inflation which peaked around 7-8% - that level of restriction is no longer required when inflation is now in and around the 2-3% target band. This is further highlighted with the 6-month annualised run rates slowing to 0.9% on headline CPI and 2.7% trimmed mean. Although the labour market remains strong, continuing to leave rates at their current level would put full employment - the other side of the RBA's mandate - at an increasing risk. The RBA must set monetary policy to balance the risks to both objectives.     

A slowing in non-tradables or domestically-driven inflation from 4.1% to 3.1%Y/Y - its softest pace back to Q4 2021 - as well an easing in price pressures in the key services basket from 4.6% to 4.3%Y/Y should give the RBA enough comfort to start easing on signs of a broadening in the disinflationary process beyond government subsidies. Goods inflation, meanwhile, declined to 0.8%Y/Y - now significantly more aligned with global trends - to its weakest in more than 8 years.      

The effects of government subsidies continued to push down on inflation strongly in Q4. That said, temporary effects - including the annual increase in tobacco excise and holiday travel in the peak summer period - added nearly 0.5ppt to quarterly inflation.   

Electricity prices nationally were down 9.9% on the quarter (following a 17.9% fall in Q3), with households benefitting from the second $75 installment from the Commonwealth government's rebate (households in some states received two installments in Q4). Commonwealth and state government electricity rebates directly cut more than 0.8ppt from headline inflation over the back half of 2024. Rent inflation moderated to a 0.6% increase in Q4 - its slowest clip since Q1 2022 - reflecting increases to the Commonwealth Rental Assistance scheme. Meanwhile, public transport fares fell a further 3.2% across the quarter (-2.1% in Q3) on subsidies in several capital cities.    

Away from the effects of subsidies, fuel prices continued to pull down on inflation with prices at the pump down 2% in Q4 after a 6.7% decline in Q3. Over the period, lower fuel prices have reduced headline inflation by more than 0.4ppt.  

Another key area that pushed down on inflation in Q4 was a 0.2% decline in new dwellings (or home building costs). This was the first decline in that series since the first half of 2021, with the ABS attributing this to home builders increasing incentives and other promotions to drive activity that has been subdued by higher interest rates.  

Preview: Australian Q4 CPI

Australia's Q4 CPI inflation report (due 11:30 AEDT) is finally upon us. The countdown to today's report has been on ever since the RBA abandoned its hawkish bias at its meeting on December 10, opening the door to easing monetary policy. Market conviction is high on a February rate cut, but good inflation outcomes are needed today as the labour market continues to remain very strong. Government subsidies to assist with the cost of living brought headline inflation back inside the RBA's 2-3% target band in Q3 for the first time since 2020, measures that underpin expectations for a further slowing from 2.8% to 2.6% year-on-year in Q4. The sticking point could be if core inflation, expected to print at 3.3%Y/Y, and prices in the services basket (4.6%Y/Y) fail to provide the RBA with sufficient signs of progress.      

December quarter preview: Government subsidies to hold CPI down further

The effects of cost-of-living measures subsidising electricity bills, rents and public transport fares are set to weigh further on inflation in the December quarter. Markets look for headline CPI to print at 0.4% quarter-on-quarter (range: 0-0.6%) and 2.6% year-on-year, down from 2.8% currently. Meanwhile, on a trimmed mean or core basis a 0.6%q/q outcome is expected (range: 0.4-0.8%), which (without revisions to prior quarters) would lower the annual pace from 3.5% to 3.3%. As it stands currently, the RBA's forecasts are for 2.6%Y/Y headline CPI and 3.4%Y/Y on the trimmed mean. 

As was the case in Q3, the key price movement will again be in electricity prices. Last quarter, federal and state government rebates saw electricity prices fall by 17.6%. These schemes should drive a further decline in Q4 - albeit with significant uncertainty around the magnitude. In the monthly CPI series, electricity prices fell by 12.3% in October; however, differences in the timing of when the various rebates have been applied led to a 22.4% rise in the ABS's calculation of prices in November. Households in Western Australia in December received rebates from both the federal and state government schemes, and this is expected to drive an overall decline in prices nationally in the final month of 2024.

The monthly CPI series indicated that government subsidies continued to lower rents and public transport fares in Q4. An increase to the Commonwealth Rent Assistance (CRA) scheme drove a 0.3% fall in rents in October before lifting by 0.6% in November. Although (as with electricity prices) there is uncertainty around the overall effect of the subsidy on rents (and therefore CPI) across the quarter, expect a further slowing following the moderation seen in Q3 to 1.6%q/q. Meanwhile, the public transport subsidies in Brisbane, Hobart and Darwin that drove a 2.1% fall in fares in Q3 still looking to be working their way through - the monthly CPI reported price declines of 0.2% in October and 0.1% in November. 

Aside from these areas in which subsidies have been in effect, new dwelling costs will be key. Inflation in new home building costs was strong through the first 3 quarters of 2024 at a run rate of 1-1.1%, but the monthly data showed a fall of 0.6% in November that the ABS noted was due to builders offering discounts and other incentives. If that continues into December, quarterly inflation for new dwellings could slow notably, which would weigh on both headline and core CPI. 

A recap: Inflation slows in Q3 on electricity rebates and lower fuel prices

Headline CPI returned inside the RBA's target band for the first time since the outset of the pandemic in the September quarter, but underlying inflation remained elevated to the target. Electricity rebates and declines in petrol prices saw headline CPI drop from 1.0% in Q2 to 0.2% in Q3 - its slowest quarterly rise since Q2 2020 - driving the annual rate down from 3.8% to 2.8%, a low since Q1 2021 and substantially below its peak of 7.8% in late 2022.

Much like overseas, the disinflationary impulse in Australia has been driven by the fading of earlier price spikes in energy, food and other goods. After largely stalling over the first half of 2024, disinflationary progress was revived in Q3 as federal and state government rebate schemes saw household electricity prices plunge (-17.3%q/q), and weaker global oil prices flowed through to the petrol pump in Australia (-6.7%q/q). On the back of this, goods inflation fell 0.6% in the quarter, slowing from 3.2% to 1.4% in annual terms. 

Removing the effects of volatile price movements, trimmed mean CPI was 0.8% in Q3 - a run rate inconsistent with 2-3% inflation over the near term; however, the annual pace still fell from 4.0% to 3.5% (slowest since Q4 2021) on base effects. The more elevated pace of core inflation highlights that price pressures remained in key areas of the basket.   

In contrast to goods inflation, services inflation firmed slightly in Q3 to a 1.1%q/q and 4.6%Y/Y pace, underpinned by household services, rents and insurance. The pass-through of higher input costs faced by firms to consumers as well as upward pressure on wages in a strong labour market have driven inflation in household services. Very low vacancy rates in the capital cities were placing upward pressure on rents, though (as outlined above) the CRA scheme led to lower rent inflation in Q3 (1.6%q/q).  

Macro (Re)view (24/1) | Tariffs bypassed... for now

Sentiment remained upbeat across markets this week as President Trump's inauguration went by without the immediate implementation of trade tariffs, while comments that he would prefer not to impose tariffs on China surprised. That set the tone for higher equities and a weaker US dollar. A hawkish 25bps hike from the Bank of Japan on the back of upward revisions to the inflation outlook supported the JPY. A lull of other event risks ahead of next week's Fed and ECB meetings saw headlines from the Davos forum gain more focus than might otherwise have been the case - notably around President Trump's call for lower oil prices and interest rates.      

The set up into next week's Fed meeting looks straightforward with markets priced for the FOMC to press pause on its easing cycle. Caution is expected to prevail amid uncertainty over the timing and design of policies under the Trump administration, while the 256k outcome on December payrolls that drove the unemployment rate to fall to 4.1% confirmed ongoing strength in the labour market. However, markets drew confidence from last week's CPI and PPI reports that the disinflationary process has not been derailed, pricing in further Fed easing in 2025 - albeit at a more gradual pace. 

Turning to the ECB, the Governing Council is expected to continue its easing cycle with a 25bps cut next week. Comments at Davos from ECB President Lagarde highlighting increased confidence in the trajectory of inflation back to target broadly aligns with market expectations for the key policy rate to be cut towards 2% over the course of the year from its current level of 3%. Restrictive monetary policy has weighed materially on growth in the euro area, while the outlook has been subject to further headwinds from trade tariffs. January's preliminary PMI reading was slightly improved at 50.2 from 49.6 in December but still consistent with an economy in which growth has essentially stalled.   

From a local perspective, attention is laser focused on next week's long-awaited Q4 CPI report. The key outturns are set to decide whether or not the RBA delivers on a 25bps rate hike in February that markets have already largely priced in. Consensus is for headline CPI to print at 0.4%q/q and 0.6%q/q on the trimmed mean or core rate. Watch out for my full preview of the CPI report ahead of the release.