Australian dwelling approvals unwind in December

Australian dwelling approvals fell more than expected in December (-14.9%) after rising sharply in November (13.1%), with volatile unit approvals (-31.6%) driving the swing. House approvals remained broadly flat (0.3%). Approvals lifted to almost 50k in the final quarter of 2025 - their highest quarterly total in 4 years - but were still well below the peaks of earlier cycles. Three rate cuts supported dwelling approvals in 2025, but if the RBA starts to reverse course as early as at today's meeting with a 25bps hike, approvals would likely be under pressure again - though on the other hand, housing prices continue to rise reflecting the tight demand-supply balance.  

Dwelling approvals were down 14.9% in December - far exceeding the expected decline of 6.4% - in another volatile result from this series. This followed a 13.1% surge in November after a 4.9% fall in October. Across the final 3 months of 2025, approvals came in at 49.9k - their highest quarterly total in 4 years after rising by 3.6% on the September quarter (48.2k). Unit approvals defied month-to-month volatility to rise by 7% in the December quarter (21.2k) to be around their highest levels seen since 2018. Quarterly house approvals lifted by 1.2% to 28.7k.  

The value of residential alteration work approved was down 1.4% in December ($1.2bn) but rose by 2.2% across the final quarter of the year. According to the September quarter national accounts, the volume of alteration work completed had risen by more than 7% through the year, indicating that demand has been the main component - rather than inflation - driving approvals.  

Preview: RBA February meeting

The RBA's Monetary Policy Board looks set to deliver a 25bps rate hike at today's meeting (decision due 1430 AEDT). This would lift the cash rate to 3.85%, reversing one of the three rate cuts delivered in 2025. The Board came into the year having effectively signalled the end of the easing cycle at the previous meeting in December, highlighting upside risks to inflation and uncertainty over the restrictiveness of policy settings. Recent data have reinforced that caution: inflation has moved further away from the 2-3% target band, while domestic growth and the labour market have surprised to the upside. This has led to a hawkish repricing of the RBA rates outlook, with two rate hikes now priced in this year - including a 70% chance of a hike today - compared to expectations for one further rate cut as recently as November.       

Last week's December quarter inflation report strengthened expectations for a rate hike today. While quarterly inflation slowed after surging in the September quarter - which the RBA largely attributed to temporary price rises - annual inflation continued to drift away from the midpoint of the 2-3% target band. Headline CPI moved up from 3.2% to 3.6% year-on-year, while the core or trimmed mean rate lifted from 3% to 3.4% year-on-year, with both measures exceeding the RBA's November forecasts (headline CPI 3.3% and trimmed mean 3.2%). For today's decision, the key issue is not the inflation overshoot by itself but rather what it implies about economic conditions more broadly. 

If the Board hikes today, its messaging is likely to emphasize that demand conditions have strengthened relative to the economy's supply capacity, putting upward pressure on inflation. Household spending and business investment lifted GDP growth to 2.1% year-on-year in the September quarter - already slightly above the RBA's year-end forecast for 2%, a pace it estimates to be around Australia's potential growth rate. Meanwhile, labour market conditions have remained tighter than the RBA was expecting. The unemployment rate averaged 4.2% over the final quarter of 2025 - defying the RBA's forecast to rise to 4.4%. 

Alongside today's decision, the RBA will publish new forecasts in the Statement on Monetary Policy - a key input for markets in assessing the rates outlook. The data (as discussed) indicates the RBA is likely to raise its inflation forecasts, while nudging up its outlook for growth and lowering its projection for the unemployment rate. But the forecasts will also take into account much more hawkish assumptions from higher interest rates and a stronger Australian dollar than compared to the November forecasts - factors that will weigh on the outlook for growth and inflation. That could set a high bar for a further hawkish repricing following the decision, unless Governor Bullock surprises at the post-meeting press conference.