Australian Q2 Wage Price Index 0.7%; 2.6%yr

Australian wages growth was softer than expected rising by 0.7% in the June quarter and 2.6% over the year. There were signs in the private sector that a tightening labour market is leading to wage pressures, consistent with the signals in survey data. In combination with the recent increase to the national minimum wage and changes to public sector wage policies, wages growth should rise towards the 3% pace expected by the RBA by the end of the year.   

Wage Price Index — Q2 | By the numbers

• The headline WPI (total hourly rates of pay ex-bonuses) came in at 0.7% in the June quarter and 2.6% over the year (prior: 2.4%Y/Y), with both outcomes 0.1ppt below consensus. 
• Private sector WPI lifted by 0.7%q/q, in line with the previous two quarters, as the annual pace firmed from 2.4% to 2.7%. 
• Growth in the public sector WPI was 0.6% in the quarter and 2.4% over the year; these outcomes compare to 0.6%q/q and 2.2%Y/Y in the March quarter. 

Wage Price Index — Q2 | The details 

For the third consecutive quarter, the WPI lifted by 0.7%. This saw the annual growth rate tick up modestly, from 2.4% to 2.6%, its strongest pace since 2014. Given the current labour market conditions, historical relationships suggest wages growth should be substantially higher, though there were signs in today's report that the underlying momentum is picking up pace.

According to the ABS, the average size of private sector pay increases was 3.8% in the June quarter, the fastest quarterly rise seen in 10 years. The effects of a tightening labour market and CPI-linked enterprise agreements drove this increase in quarterly pay. Although only 14% of jobs were reported to have received an increase during the quarter, this was slightly higher than occured during the June quarter in 2020 (9%) and 2021 (12%). 

Private sector firms are also turning to bonuses and once-off payments to assist in retaining staff and in response to cost of living pressures. The private sector WPI inclusive of bonuses lifted by 0.9%q/q to be running at 3.3% through the year, its fastest since Q3 2012. 

Headline growth in the private sector WPI was 0.7% in the June quarter, which lifted the annual increase from 2.4% to 2.7%. This remains in front of wages growth in the public sector at 0.6%q/q and 2.4%Y/Y, due to wage policies implemented by state governments across the nation; though in many cases these will ease from next quarter. Public sector wages lifted sharply in Queensland (1.2%q/q, 4.0%Y/Y) due to a change in wage settings in the state.  

At the industry level, the standout rise in wages growth in the June quarter was in the construction industry. Shortages of skilled labour saw wages growth rising by 1.4% in the quarter, its sharpest acceleration in 8 years, to be up by 3.4% through the year, the fastest of all industries. 

Annual wages growth remains at the stronger end of the scale in business and related services. High levels of churn in these industries, with many workers switching jobs over the pandemic, has helped push up wages growth in a tightening labour market. 

Wage Price Index — Q2 | Insights

Today's outcome was in line with the RBA's August forecasts for wages growth, which it anticipates to rise to 3% by the end of the year. Another strong labour market report tomorrow would likely seal another 50bps rate hike in September. A more pronounced rise in wages growth is likely to be seen next quarter as the recent decision by the Fair Work Commission to raise the national minimum wage by 5.2% starts to flow through and as new wage policies in the public sector take effect. 

Preview: Wage Price Index Q2

Australia's Wage Price Index (WPI) for the June quarter is due to be released by the ABS at 11:30am (AEST) today. A robust labour market has delivered the lowest unemployment rate in almost 50 years and indicators of wage pressures in survey data have been rising in response. Today's report is expected to show an uptick in base wages growth to 2.7% led by the private sector.   

As it stands | Wage Price Index

The strong recovery in the Australian labour market has driven the unemployment rate down to its lowest level since the early 1970s and supported a rebound in wages growth. As at the March quarter, annual growth in the WPI was 2.4%, up by 1ppt from its low point in the midst of the Covid crisis in 2020. However, wages growth remains subdued both in a historical context and relative to the rise in inflation over this period. The recent momentum has shown signs of quickening by coming in at 0.7% in each of the past two quarters, the sharpest quarterly pace in around 8 years.   

The private sector is driving wages growth in Australia. The main impulse is coming from individual agreements with many firms lifting base wages to retain staff in a tightening labour market. Wages growth in the sector lifted by 0.7% in the March quarter to be up by 2.4% through the year. Growth in public sector wages is running at a slightly softer pace at 0.6% in the quarter and 2.2% over the year, reflecting public sector wage caps implemented by state governments across the nation. 

Strong demand for labour associated with the economic recovery and high levels of job mobility have seen wages rising fastest in industries in business and professional services. Some of the industries hit hard by the pandemic are also seeing wages picking up relatively more quickly, in particular in accommodation and food services and arts and recreation services as staff shortages have become more acute. Shortages of skilled trades has been a major constraint in the construction industry, contributing to the rise in wages growth. 

Market expectations | Wage Price Index

The median forecast is for the WPI to rise by 0.8% in the June quarter and lift the annual pace to 2.7%. Wages growth in Australia hasn't exceeded a 2.5%Y/Y pace (above the midpoint of the RBA's inflation target band) pace since 2014.  

What to watch | Wage Price Index

Much of the coverage of today's report is likely to be in the context of high inflation driving falling real wages. Keep in mind, however, that the magnitude of the real income squeeze is likely to be less than implied by these assessments because household income (and labour income) is much broader than what the WPI measures. In another context, the key in today's report will be to see what the response from base wages to the tightening labour market has been. The RBA forecasts wages growth to be at 3% by the end of the year and at a pace that will be starting to add to inflation pressures. An outcome today that keeps that forecast on track is likely to be enough justification for the RBA to hike rates by 50bps for the 4th month in a row at the September meeting. 

Macro (Re)view (12/8) | US inflation slows

For markets well accustomed to upside surprise after upside surprise on US inflation, July's below consensus outcomes on the headline and core measures was reason enough to drive a rally in risk sentiment, denting the US dollar a bit. There was no real reaction in the bond market as the US curve between the 2 and 10-year segments remained inverted by around 40bps, likely with last week's very strong labour market report still clear in the mind in terms of assessing the outlook for Fed policy.  

US inflation slows in July  

In welcome news, US inflation pressures showed significant signs of easing as both consumer prices and producer prices posted their weakest month-on-month outcomes in July since the early stages of the Covid pandemic. Headline consumer prices flatlined in the month (vs 0.2% expected) resulting in the year-over-year pace slowing from 9.1% to 8.5%, while a 0.3%m/m rise left the core rate (ex-food and energy) steady at 5.9%Y/Y. Pipeline inflation pressures also cooled as producer prices declined in July (-0.5m/m), though the annual pace is still elevated (9.8%Y/Y) and it will take a much more sustained easing in the indicators of supply chain constraints to come down. 

Compared to June's 1.3% rise in headline CPI, the 0% outcome in July represented a significant slowing in inflation. This was predominantly driven by a large fall in gasoline prices (-7.7%m/m), though inflation in durable goods (0.3%m/m) and services (ex-energy) (0.4%m/m) also slowed noticeably in the month. On the other hand, food (1.1%m/m) and shelter (0.5%m/m) costs are continuing to rise at a strong pace and both components have made substantial contributions to the annual inflation rate. 

Australian consumer and business sentiment diverges further 

Consumer sentiment on the Westpac-Melbourne Institute index fell a further 3% in August to remain around the lows from the previous two downturns (GFC and Covid) in Australia. Contrast that with business sentiment in the NAB Survey rising to an above-average level of +7 in July. Consumers are feeling downbeat due to the rise in inflation while the RBA's rate hiking cycle has come as a further hit to household budgets. However, household spending has remained much more resilient than the sentiment readings would imply. Firms, in seeing robust demand, have been confident in passing on cost increases to customers. Still, firms are taking on some margin compression with purchase costs rising at a faster pace than product prices in the NAB survey. The strength of the labour market is also leading to fast rises in labour costs (running at a quarterly pace of 4.6% in July) and next week's Wage Price Index data for Q2 will provide an update of increases to base wages in Australia (0.8%q/q expected). July's Labour Force Survey is also due next week with the median estimate for employment sitting at +25k and 3.5% on the unemployment rate.    

UK economy contracts as households' resilience starts to fade  

Real GDP in the UK contracted by 0.1% in the June quarter. Factors unrelated to underlying economic conditions largely drove the decline, including from the winding up of government pandemic-related spending measures and the effect of an additional public holiday during the Queen's Jubilee. However, there are now clear signs that household consumption is losing momentum as high inflation is driving falling real incomes and as the BoE continues to raise rates. In the June quarter, household consumption slowed sharply to fall by 0.2%q/q from a 0.6%q/q increase in Q1. The pressure on household spending is set to intensify given household energy prices will reset higher in October, though some of the impact should be attenuated by fiscal support measures expected to be announced once the leadership of the government has been settled.

More broadly, the bleak outlook for the UK economy outlined by the BoE (discussed in last week's review) reflects the adjustment from a negative shock to the terms of trade. Surging global prices for energy and goods, of which the UK is a net importer, have seen import spending accelerate sharply over the year (31%) whereas earnings from exports are up relatively modestly (13.1%). That outflow of capital has seen the trade deficit widen significantly to around 5% of nominal GDP from around 0.2% a year ago. 

The resulting impact has unleashed widespread inflation pressures in the UK as firms have passed-through input cost rises to customers. The next phase, as described by the BoE, is the pullback in demand as declining real incomes forces households and businesses to cut spending, with the Bank forecasting the UK economy to fall into a recession by the end of the year. 

Macro (Re)view (5/8) | On notice

July's US labour market report came in much hotter than expected, causing markets to factor in the continuation of aggressive Fed tightening, in turn boosting the US dollar while equity markets again showed their resilience. This week also saw the RBA and the BoE hiking their respective policy rates by 50bps, the latter doing so as it forecast the UK economy to fall into recession by the end of the year.

RBA continues to hike at pace  

The RBA Board delivered its third consecutive 50bps rate hike this week, its 4th hike overall in the current tightening cycle, taking the cash rate target to 1.85% (reviewed here). The main message in Governor Philip Lowe's statement was that further hikes are needed to lower inflation and to achieve a "more sustainable" supply/demand balance in the Australian economy. This was, however, a nuanced statement, seemingly giving encouragement to markets that sense a downshift in the pace of RBA hikes is nearing. The statement referred to its commitment to the inflation target while also keeping the economy on an "even keel". It may also be notable that whereas previously the Board characterised its rate hikes as the "withdrawal of extraordinary monetary support", it now refers to the "normalisation of monetary conditions", adding also the cash rate was "not on a pre-set path" in that process.      

The RBA's August Statement on Monetary Policy spoke of the "narrow" path ahead of the Board as it looks to press on with hiking rates, responding to forecasts for higher inflation at the same time as the growth outlook has softened. Growth this year is now expected to come in at 3.25%, 1ppt lower than in the May update, before slowing to a 1.75% pace in both 2023 (down from 2% previously) and 2024. The inflation outlook was revised to show an expectation that price pressures will remain elevated for longer. The peak for headline CPI is now forecast to be 7.75% (up from around 7% previously) in the December quarter, moderating next year to 4.25% (from 3.25%) before returning to the top of the target band at 3% in 2024. Although a stronger labour market has seen the Bank lift its forecast trajectory for wages growth, higher inflation means the squeeze on real house incomes is now expected to be larger. The associated implications are a key factor the Board is monitoring. 

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For those interested, I have reviews on the main Australian data points from the past week in retail sales (here), housing finance (here), dwelling approvals (here) and international trade (here).  

BoE speeds up tightening as the outlook deteriorates 

Invoking its guidance to "act forcefully" to the rising risk of persistent inflationary pressures, the Bank of England's MPC upped the pace of its tightening cycle, increasing Bank rate by 50bps to 1.75%. Five committee members changed their vote at this week's meeting, swinging the outcome to an 8-1 decision from 6-3 in favour of June's smaller 25bps hike. The move to turn more aggressive on tightening came as the Bank had to once again raise its inflation forecasts, now expected to reach a peak of around 13% in Q4 with the next reset in household energy prices to hit in October, but risks an increasingly severe growth tradeoff with the economy expected to fall into recession by the end of the year.   

The latest Monetary Policy Report presented a grim outlook for the UK economy. The overall synopsis is that the intensification of inflation pressures will further squeeze real household incomes and cause a recession. In the post-meeting press conference, Governor Andrew Bailey said the BoE was uncertain of the magnitude of that recession, with estimates for the peak-to-trough decline in output in a range between 1.5% to 2.25%, heavily dependent on the evolution of energy prices. The top of that range would be a recession broadly similar to the early 1990s but less severe than during the GFC. It then forecasts a weak recovery of flat growth in 2024 and just 0.4% in 2025. Concerningly, inflation is now projected to remain elevated for longer. After peaking at 13.3% in Q4, inflation falls to 9.5% by Q3 next year, the figure revised up sharply from 5.9% in the May forecasts. It then takes another year for inflation to return to the Bank's 2% target, in Q3 2024. 

In addition to hiking rates, the MPC also outlined its plans for reducing the size of its balance sheet. Back in February, the MPC began the process of quantitative tightening, deciding against reinvesting maturing bonds held in its Asset Purchase Facility (APF). In a market release, the MPC advised that it intends to commence active gilt sales "shortly after" its September meeting if market conditions are deemed "appropriate". The MPC's plan targets an overall reduction of £80bn in the APF's gilt holdings over the coming 12-month period, constituting £10bn of sales each quarter with the remainder coming from maturing bonds rolling off the balance sheet.   

Hot US labour market defies recession fears

A stunning labour market report in July saw non-farm payrolls surging by 528k, coming in more than double the consensus estimate of 250k. July's outcome (and net revisions of +28k over May-June) have driven US employment back above its pre-pandemic level, to now stand 32k higher than in February 2020. The unemployment rate is at its lowest level since the pandemic struck, falling from 3.6% to 3.5%, and broader underemployment remained at the historical low of 6.7%. The ongoing imbalance in the US labour market is on the supply side, with the participation rate a touch lower at 62.1% than in June (62.2%) and remaining more than 1ppt lower than pre-pandemic. Wage pressures remain elevated as a result, with growth in average hourly earnings ticking up to a 5.2%Y/Y, whereas markets forecast the pace to ease from 5.1% to 4.9%.  

Australian trade surplus hits new record high in June

Elevated Australian trade surpluses keep coming as the surplus for June reset to a new record high of $17.7bn. Surging commodity prices are continuing to drive export earnings higher, boosting national income. The wider resumption of offshore travel is supporting rising imports.

International Trade — June | By the numbers

• Australia's trade surplus was $17.7bn in June, up from $15bn in May (revised from $16bn) defying the consensus for a fall to $12bn.

• Exports advanced by 5.1% rising to $61.5bn, the 6th month running in which exports have reset to a record high, the level now up 41.4% over the year. 
• Imports firmed by 0.7%m/m to $43.9bn, also standing at a record high having risen by 33.5% over the year. 

International Trade — June | The details

Australia turned out a record breaking quarter in international trade as the trade surplus came to $45bn for the 3-months to June, a substantial rise from $29bn in Q1. The key theme has been surging exports with commodity prices rising sharply as existing supply/demand imbalances in the market were exacerbated by the Ukraine war. Export earnings rose another 5.1% in June to be up by almost 15% over the quarter. Imports were 0.7% higher in June, posting a 5.3% rise in the quarter. The key factors were the surge in fuel imports reflecting soaring prices and the rebound in the services sector taking shape as offshore travel restrictions eased. 

Roughly half of the rise in exports in June came from the volatile non-monetary gold component, with broadly equal contributions coming through from rural goods and non-rural goods. Across the quarter, non-rural goods led the way rising by 15.7% on the tailwinds from surging commodity prices. This boosted earnings from coal (37%), other mineral fuels (inc LNG) (20.7%) and metals (12.5%), while iron ore saw a relatively modest increase (3.5%). 

   

Prices for many agricultural commodities also rose sharply in response to the Ukraine war. As a major exporter of these products, Australia's rural sector saw an earnings boost. Meat exports were up 12%q/q, cereals and grain rose by 5.6%q/q, wool saw an uplift of 18.1%q/q and other rural products increased by 4.4%q/q. 

Turning to imports, expenditure in June lifted by 0.7% for an overall rise of 5.3% through the quarter. The major contributors over the past 3 months have been the services sector (14.8%q/q) as the post-pandemic recovery started taking shape, tourism services rising almost 70% in response to eased offshore travel restrictions; while intermediate goods advanced strongly (6.4%q/q) as fuel surged (36.9%q/q) on the back of soaring prices. Consumption goods softened slightly (-0.5%q/q) due mainly to a pullback in vehicle imports. Capital goods were up by 2% in the quarter, with machinery and industrial equipment continuing its upswing (9%q/q). 

Taking a closer look at services trade in tourism spending, overseas tourism is seeing a much faster rebound than inbound tourism, though both are still well below pre-pandemic levels. 

International Trade — June | Insights

Surging export earnings boosted Australian national income during the June quarter, with the terms of trade likely to have risen to a new record high. This is a vastly different situation to the European and UK economies which have endured a negative terms of trade shock as commodity prices escalated. International trade is also likely to have contributed strongly to domestic economic growth, potentially adding around 1ppt to Q2 GDP. 

Australian retail sales 0.2% in June; Q2 volumes 1.4%

Australian household spending was robust over the first half of the year, extending the momentum post the Delta lockdowns. Retail sales volumes expanded by 1.4% in the June quarter, defying headwinds to demand from falling real incomes, rising interest rates and weak sentiment.

Retail Sales — June | By the numbers 

• National retail sales slowed to a 0.2% rise in June, in line with the initial estimate, coming in at $34.2bn. This was the slowest month-to-month rise in retail sales so far in 2022. 

• Base effects advanced 12-month retail sales to 12% from 10.2%. 

• Retail volumes (inflation-adjusted sales) increased by 1.4% in the June quarter, stronger than expected (1.2%) and up from Q1's 1% rise. Volume growth through the year lifted from 4.8% to 5.5%. 
• Retail prices lifted by 1.7% in the quarter following a 1.8% rise in Q1. 

Retail Sales — June | The details  

The resilience in household spending highlighted by the RBA again at yesterday's meeting was evident in the latest retail sales report. The pace of nominal spending was 3.2% in the June quarter, up slightly on Q1 (2.9%). The contribution to quarterly retail sales from underlying demand in volumes was 1.4ppts, a little stronger than in Q1 (1ppt), and 1.7ppts from inflation. Although there are many headwinds faced by households from cost of living pressures, rising interest rates and weak sentiment, demand has been robust to this point. Retail volumes were up by 2.5% over the first half of the year, and have risen by 10.4% since the reopening from the Delta lockdowns.   

    

Looking across the categories, the impact of high inflation has weighed most sharply on food and household goods. Volume growth in food contracted by 0.8%, its third straight fall, with prices up by 2.1% due largely to supply constraints and rising input costs for producers. Household goods declined by 1.8%q/q as demand rotated to services categories following the wider reopening of the economy. Supply chain pressures and shortages continue to see household goods rising at pace. 

Elsewhere, robust demand in volumes is the main factor driving spending. This is particularly evident in cafes and restaurants (8.6%q/q), which looks to be generating an associated boost for clothing and footwear (3.9%q/q) with people getting out and about and travelling again.  

Taking a closer look at prices, inflation pressures were broad based in the sector. Consistent with last week's Q2 inflation report (see here), prices in consumer durables were on the rise: household goods (2.3%q/q), clothing and footwear (2.5%q/q) and department stores (2.6%q/q). Despite strong demand, prices are rising at a more modest pace at cafes and restaurants (1.4%q/q). Food inflation remains strong (2.1%q/q) with groceries contributing heavily to the quarterly CPI.

Turning to the states, volumes advanced across the nation in the June quarter, continuing their post-pandemic expansion. Gains ranged from 2.4%q/q in Queensland to 1.1%q/q in New South Wales. Overall, Western Australia leads the way where volumes are now up by more than 16% since the end of 2019. New South Wales and Victoria, accounting for nearly 60% of national retail trade, have recovered from the Delta wave lockdowns to be around 11% above pre-Covid levels.     

Retail Sales — June | Insights

Household retail spending was robust in the June quarter and over the first half of the year, supported by the easing of Covid restrictions, accumulated savings and a strong labour market. Those drivers offset headwinds from falling real incomes, rising interest rates and weak sentiment. The slowing trend in monthly retail sales growth from 1.8%m/m in February to 0.2%m/m in June suggests that these headwinds may be starting to turn the screws on retail spending. That said, that slowdown is also likely to be reflecting the broader rotation back to services categories that are largely not captured in the retail data.

Australian dwelling approvals flat in June

Australian dwelling approvals posted a better-than-expected result in June and recording their first quarterly rise in a year. After an extended downturn, that may yet have further to run, both the house and unit segments contributed to the quarterly rise in dwelling approvals. 

Building Approvals — June | By the numbers

• National dwelling approvals (seasonally adjusted) were broadly flat in June (-0.7%m/m) at 16,461 against the median estimate for a 5% decline. Approvals have fallen by 17.2% over the year. In the previous month, approvals lifted by 11.2% (revised from 9.9%). 

• House approvals increased by 0.9% to 9,910 (-22.1%yr) following a 1.8% fall in May. 

• Unit approvals were down by 3.1% month-on-month to 6,552 (-8.4%yr). Approvals in the segment spiked in May rising by 37.6%.

Building Approvals — June | The details 

Having receded from their cycle high reached in early 2021, dwelling approvals stabilised over recent months to rise by 2.4% in the June quarter. Both house (2.2%) and unit approvals (2.9%) lifted in the quarter, their first quarterly increases since Q1 2021 and Q3 2021 respectively.  

The quarterly total for detached house approvals was 29.7k, well down from the peak in Q1 of last year at around 41k. Higher-density approvals came to 18.2k in the June quarter, broadly in line with pre-pandemic levels. The underlying data indicated that high rise approvals lifted strongly over the quarter; low rise approvals contracted and townhouse approvals were broadly flat.

On the alterations side, the value of alteration work approved declined in June (-2.2%) but still advanced by nearly 4% in the quarter. The surge in materials and labour costs has contributed to keeping alteration approvals very elevated long after the HomeBuilder stimulus has wound down.  

Turning to the states, dwelling approvals posted quarterly declines in New South Wales (-2.3%) and Victoria (-3.5%), the latter being driven by weakness in the higher-density segment (-13.6%). The other states all saw quarterly rises led by unit approvals: Queensland 2.5%, South Australia 13.5%, Western Australia 34.8% and Tasmania 10.9%. 

Building Approvals — June | Insights  

After declining sharply for more than a year, dwelling approvals showed signs of stabilising in the June quarter. That comes despite the already very elevated level of work in the pipeline, capacity constraints in the construction sector and housing prices starting to decline with interest rates on the rise. Dwelling approvals appear likely to come under renewed pressure given these headwinds. 

RBA hikes by a further 50bps in August

The RBA Board hiked rates by 50bps at today's meeting, lifting the cash rate target to 1.85% and the Exchange Settlement rate to 1.75%. This was the third consecutive hike of 50bps following the initial increase of 25bps in May. With rates still below the estimated neutral range and inflation now expected to reach a higher peak, further hikes remain in prospect.

The key message in today's decision statement from Governor Philip Lowe was that with inflation to keep climbing to reach a new forecast peak of 7¾% towards the end of the year, further rate hikes will be needed to ensure its return to the 2-3% target band "over time". Despite the RBA lowering the domestic growth outlook in 2022 from 4.2% to 3.25%, in part driven by a weakening global economy, the view of the Board is that the window to continue hiking remains open. Backing that assessment was the strength of the labour market, with the unemployment rate expected to fall further from its 50-year low of 3.5% based on the high level of job vacancies; household spending had been "resilient", business investment was on the rise and the terms of trade was supporting national income. 

The RBA's outlook becomes much more nuanced in 2023. Although inflation is projected to slow sharply next year, it is forecast to remain above target at above 4% (revised up from 3.1% previously). At the same time, domestic growth is expected to slow sharply to 1.75% (down from 2%), leading to a modest uptick in unemployment to around 4% by the end of 2024. With the growth outlook made more uncertain due to global factors including the the Ukraine war, Covid in China and the impact of high inflation, today's statement noted the Board was treading a "narrow path" as it tightens monetary policy to lower inflation while also looking to keeping the Australian economy on an "even keel".

Looking ahead, the Board reiterated that there are further steps to be taken in "normalising monetary conditions". Markets are priced for one final 50bps hike in September, followed by a pivot back to 25bps increases in October, November and December. The pricing for September looks justified in the context of the Board accelerating the return of the policy rate to the neutral range, estimated by the RBA to be around 2.5%. While the emphasis remains on the data flow, simply being close to neutral could be enough to trigger the October pivot markets look for. 

Australian housing finance on the decline in June

Australian housing finance commitments posted their steepest fall since the start of the pandemic, contracting by 4.4% in June as the RBA's rate hiking cycle accelerated pace. Lending to both the owner-occupier and investor segments contracted in the second quarter while refinancing activity lifted sharply as many borrowers sought lower interest rates. 

Housing Finance — June | By the numbers

• Housing finance commitments (ex-refinancing) fell by 4.4% in June (vs -3% expected, previous +1.8%m/m) to $31bn, its largest month-on-month decline since May 2020. Commitments are down by 2% over the year.  
• Owner-occupier commitments were down by 3.3% for the month at $20.5bn (-9.6%yr), more than reversing May's 2.2% rise. 
• Investor commitments declined by 6.3%m/m to $10.5bn, slowing annual growth from 23.7% to 17.3%.   
• Total refinancing accelerated by 6.2% in June to reach a new record high at $18.2bn (17.8%yr).

Housing Finance — June | The details 

Although monthly housing finance commitments alternated between rises and declines over the first half of the year, June's 4.4% fall was the largest contraction posted since the outset of the pandemic, pointing to the effect from the start of the RBA's rate hiking cycle. In June, the RBA lifted its pace of rate hiking to 50bps from 25bps in May. The overall level of commitments remains elevated, however, at around $31bn. 

Commitments in the owner-occupier segment were down by 3.3% in June, to be down by 2.2% over the second quarter.  Weakness in the quarter was driven by upgraders (-3.6%q/q) and first home buyers (-4.5%) due to a combination of affordability constraints and rising interest rates. Underlying volumes reflected this pullback in demand, falling by 4.2%q/q for upgraders and 5.3%q/q for first home buyers. Construction-related commitments advanced (2.5%q/q), though that most reflects the escalation in building costs, with the underlying volume of approvals flat (0.4%) in the quarter.  

Investor commitments saw their largest month-on-month fall since May 2020, down 6.3% in June. That left commitments 4.6% lower over the June quarter. As the chart above shows, this was the first quarter in 2 years in which lending fell to both major segments, likely marking the turning point in the cycle. 

As activity in the housing market slowed, refinancing volumes were rising as many borrowers responded to rising interest rates by switching lenders for more competitive offers. The value of refinancing lifted by 6.2% in June, driven by a 9.7% lift in the owner-occupier segment. Over the quarter, the value of refinancing lifted sharply by 8.4%. By volume, refinancing approvals surged by 9.8% to a record high at 24.4k in the month and increased by 11.7% over the quarter. 

The slowdown in the housing market is being driven by the two major states: New South Wales and Victoria, with weakness also evident in other states. Owner-occupier commitments in Q2 fell in NSW (-7.1%) and Vic (-3.9%), with Western Australia also down by 5.1%. Declining lending to first home buyers was a key factor in these declines: NSW -9.2%q/q, Vic -4.7%q/q and WA -7.3%q/q. In the investor segment, Queensland saw the largest quarterly fall (-17.2%) as NSW (-10.3%), Vic (-3.8%) and South Australia (-4.4%) also saw declines.   

Housing Finance — June | Insights

The housing market is starting to cool after a very strong period of conditions alongside the economic recovery from the pandemic. Rising interest rates and affordability constraints are weighing on housing finance demand, with housing prices starting to decline in several markets according to the latest data from CoreLogic. With further rate hikes on the way as the RBA looks to return inflation to its 2-3% target band, the housing market is likely to continue its slowdown over the months ahead.    

Source: CoreLogic