Macro (Re)view (10/2) | RBA tilts more hawkish

Hawkish messaging from central banks around the need to take rates higher appeared to be taken on board as the bullish sentiment running through markets lost momentum. Many equity markets saw their first weekly declines in 2023. Bond yields steepened, notably so in Australia following more aggressive forward rate guidance from the RBA. But markets were largely in a holding pattern ahead of next week's US CPI data; the headline rate is expected to ease from 6.5% to 6.2% in January and from 5.7% to 5.4% on the core rate. 

RBA steps up hawkish stance 

The RBA Board delivered a hawkish hike of 25bps to 3.35% at its first meeting in 2023 (see here). Strengthened guidance in Governor Lowe's meeting statement for "further increases" in rates saw markets reprice the peak cash rate to around 4% and pushed back the timing for a pause. The Board has taken on a more hawkish leaning as underlying inflation pressures in Australia surprised to the upside in the December quarter. 

As a result, the RBA's February Statement on Monetary Policy (SoMP) projects a slower decline in inflation in the year ahead. Headline CPI is anticipated to fall from 7.8% currently to 4.8% (from 4.7% previously) but it was the slower progress in trimmed mean inflation at 6.9% to 4.3% by year-end (from 3.8%) that has the RBA's attention. Alongside this, the RBA's liaison program has picked up that the strong labour market is supporting a faster pace of wages growth; the forecast for 2023 projects a rise to 4.2%, up from 3.9% earlier expected. Inflation pressures are forecast to ease at a slightly faster pace through 2024 ahead coming back to the top of the target band in mid-2025.

Source: RBA February SoMP

The growth forecasts at 1.6% in 2023 and 2024 were essentially unchanged and suggest the RBA's central scenario is that it can "keep the economy on an even keel" as it brings down inflation. But with rates set to press higher, the SoMP notes the path to achieving this soft landing for the economy "remains narrow". There are major uncertainties around the consumer and how spending patterns will hold up amid the crosscurrent from cost-of-living pressures and rising interest rates while at the same time, the labour market is supporting income and the stock of savings built up over the pandemic remains large on aggregate.   

On the data front this week, retail sales volumes declined in the December quarter on a combination of higher prices and spending continuing to rotate to services post the pandemic (see here). Trade data reported the trade surplus elevated to $12.2bn and widened substantially over the final quarter of the year, which looks likely to drive a sizeable positive contribution to GDP growth from net exports (see here). 

US payrolls report continues to reverberate

January's very strong labour market report saw Federal Reserve officials pushing a hawkish line, reiterating the message from last week's FOMC meeting that rates had further to rise. Fed Chair Powell told an audience at the Economic Club of Washington that while a "disinflationary process" is underway, lowering inflation to the target would likely "take quite a bit of time, and is not going to be smooth". Chair Powell said the labour market was "extraordinarily strong" and meant that a persistence of services-related inflation could elongate the process. Other Fed officials including Waller, Cook, Williams and Kashkari all said during their remarks this week that further rate increases were on the table.   

UK growth stalls   

Growth in the UK economy stalled in the December quarter and slowed sharply over the year (0.4%) as the post-pandemic rebound was cycled and cost-of-living pressures impacted spending. Pay disputes affecting the transport and health sectors also appear to have been a factor that hampered activity in the most recent quarter. Governor Bailey told members of the Treasury Committee that the Bank of England's latest rate hike came in response to upside risks to inflation feeding through from wage-setting processes. 

In Europe, the delayed German inflation print for January was the highlight of the week. Headline inflation lifted a touch to 8.7%yr (from 8.6%) but this was slightly below expectations for 8.9%. However, the EU-harmonised measure showed a softening from 9.6% to 9.2% in December. ECB officials followed up last week's meeting with hawkish comments. Vice President de Guindos said the ECB had observed signs that its tightening cycle was taking effect on financing conditions but that the Governing Council was likely to raise rates by a further 50bps at the March meeting.   

RBA continues hiking rates in February

The RBA Board hiked rates for the 9th successive meeting raising its key rates by 25bps to 3.35% on the cash rate target and 3.25% for Exchange Settlements. A hawkish tilt appears to have been made by the Board despite the outlook for the domestic economy having essentially not changed over the summer. 

If the market reaction is anything to go by, today's decision statement from Governor Lowe has signalled a hawkish turn from the RBA on fighting inflation. The key was a tweak to the Board's forward guidance on rates. In December, the statement noted: "The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course". But in today's statement, a stronger tone was used: "The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary". Markets responded by raising pricing for the terminal rate to now be pressing 4% from around 3.6% pre-meeting. Meanwhile, the 3-year and 5-year bond yields surged to close the session 15bps higher at 3.24% and 3.35% respectively. 

From my perspective, while I don't think the key message in the forward guidance has changed all that significantly, it does appear the RBA now tilts a bit more in the hawkish direction. This is despite the RBA appearing to make no changes to either its inflation outlook (4.75% this year and around 3% in mid-2025) or its growth forecasts (1.5% this year and next). Besides this point, there are some rather confusing observations in the statement.  

Firstly, it notes that strong domestic demand is "adding to inflationary pressures" but then goes on to say that the post-pandemic rebound in services has "largely run its course" and that the effect of tighter financial conditions will "constrain spending more broadly". Meanwhile, it continues to note the Board recognises the full effects of the cumulative increase in rate is yet to work through to mortgage payments. Already it observes that households with lower savings buffers are being squeezed by rate hikes and cost-of-living pressures, while household balance sheets are, on aggregate, now worse off due to the falls in housing prices.   

Secondly, global inflation is acknowledged as "moderating" due to falls in energy prices, the resolution of supply chain pressures and rising interest rates, but as highlighted above this has not lowered the trajectory for Australian inflation. Arguably, a stronger adjective could have been used than "moderating". Since the previous forecasts were produced, inflation has come down across the US (7.8% to 6.4%), euro zone (10.6% to 9.2%) and the UK (11.1% to 10.5%) to name a few examples. Referring to the US, Fed Chairman Powell said last week that there is a "disinflationary process now getting underway". 

Thirdly, the line that medium-term inflation expectations "remain well anchored" has been retained but it then goes on to speak about the importance of avoiding a "prices-wages spiral" and the risk of high inflation becoming "entrenched in people's expectations".

The statement did continue to stress the large degree of uncertainty around the outlook and the range of scenarios that could unfold for the Australian economy. Governor Lowe continued to state that the Board is attempting to keep the economy "on an even keel", but the "path to achieving a soft landing remains a narrow one". Greater detail on the RBA's thinking should come to hand in Friday's quarterly Statement on Monetary Policy.  

Australian trade surplus $12.2bn in December

Australia's trade surplus narrowed in December but remained at very elevated levels above $12bn. A substantial widening in the trade surplus over Q4 points to a rebound in the contribution to economic growth from net exports.  

International Trade — December | By the numbers

• Australia's trade surplus narrowed to $12.2bn in December from $13.5bn in November (revised up from $13.2bn), coming in a bit lower than expected ($12.5bn). 

• Exports posted a 1.4% fall in the month to $57.8bn, its third consecutive decline though earnings still advanced over the quarter (2.6%). Annual growth moderated from 29.3% to 24.8%.   
• Imports saw a 1%m/m rise coming in at $45.6bn. Import spending declined in Q4 (-3.2%), as annual growth slowed to 18% from 24.5%. 

International Trade — December | The details

Australia's trade surplus was narrower in December as exports declined and imports rose, though it widened substantially over the final quarter in 2022. The quarterly trade surplus was around $38bn from $29bn in Q3. Exports picked up to rise by 2.6% after falling in Q3, led by commodities. In contrast, import spending eased in Q4 (-3.2%) following a surge in Q3 (9.3%) reflecting falls in fuel prices and some easing of demand and pricing pressures in traded goods. 

In December, the weakness in export earnings (-1.4%) mainly reflected a decline in non-rural goods (-2.6%) on broad-based falls in the major commodities: iron ore -3%, coal -1.8%, other mineral fuels (LNG) -5.6% and metals -15.4%. Rural goods also declined as earnings from meat (4.6%) and cereals (-6.4%) softened. The services sector made a neutral contribution to monthly exports and still remains in post-pandemic recovery mode, with tourism-related earnings still down by more than a third on end-2019 levels. 

The rise in import spending (1%) in the month ended a run of three consecutive declines. The capital goods segment lifted more than 12% in the month on broad-based rises across industrial, communications and transport equipment. Car imports (part of consumption goods, which lifted 1.5%m/m) also advanced sharply (10.8%), collectively these gains are indicative of the easing of supply chain pressures that previously hampered production. Intermediate goods saw a 5.8% fall due largely to fuel (-10.4%) as prices continued to roll over from their recent highs. 

Overseas travel during the peak holiday period in Australia picked up very sharply driving services imports to a 4.4% rise. Tourism-related spending was up more than 19% in the month, though the level was still 29% below where it was prior to the pandemic at the end of 2019.  

International Trade — December | Insights

The elevation in the quarterly trade surplus was driven by rising exports and declining imports, pointing to a solid contribution to quarterly GDP from net exports. However, recent data on trade prices indicates that the terms of trade moved further below their recent high in Q4 reflecting declines in global commodity prices.  

Preview: RBA February meeting

The RBA Board returns from its summer break today where it is expected to resume its tightening cycle with another 25bps rate hike (decision due at 2:30pm AEDT). Revised economic forecasts should reaffirm the expectation for headline inflation to fall over the course of the year; however, there may be more caution around underlying inflation pressures and lead the Board to retain its guidance for further rate increases. This preview covers 3 keys to today's meeting.       

1. The decision: rates to be hiked by 25bps... 

Rates are widely expected to be hiked by 25bps to 3.35% (and 3.25% on bank reserves). Since October, the governor has remarked in his meeting statements that "inflation in Australia is too high" and that will be the basis of today's hike following the most recent CPI report. The minutes from the December meeting showed that the Board had all options on the table considering hikes of 25 or 50bps or going on pause. The "importance of acting consistently" led the Board to announce a 25bps hike and I assess the probability of it changing course today (in either direction) to be low.

2. The forecasts: inflation to fall as growth slows but risks remain...   

The RBA has revised its economic forecasts for today's meeting, but they won't be made public until the quarterly Statement on Monetary Policy is published on Friday. However, Governor Lowe is likely to provide an overview of the outlook in today's statement. The forecasts probably won't change significantly but there may be some tweaks given the developments that have occured in the global economy over the RBA's summer break.  

Firstly, global inflation pressures have shown more convincing signs of easing. Headline inflation rates in the US, Europe and the UK have declined as energy and goods prices have fallen. Secondly, China's accelerated exit from its Covid zero approach has improved prospects for global growth. Domestically, Australian inflation lifted broadly in line with RBA forecasts to 7.8%, though underlying inflation pressures at 6.9% were a bit higher than the Bank anticipated (6.5%). 

For Australian inflation, it would not surprise if the RBA were to forecast a slightly faster decline in headline inflation in 2023 (4.7%) and 2024 (3.2%) given global trends. But as the Fed, ECB and BoE highlighted at their respective policy meetings last week, the RBA will likely say there is the risk of underlying inflation remaining more persistent than expected amid very strong labour market conditions and rising prices in the services sector. 

The growth outlook will likely continue to forecast the domestic economy slowing well below trend this year (1.4%) and next (1.6%) but avoiding a recession, in part helped by the improved global backdrop. For reference, last week the IMF revised its growth forecasts for Australia to 1.6% in 2023 and 1.7% in 2024. The main uncertainty will continue to be around the outlook for household spending with the full effect of rate hikes yet to flow through. Robust labour market conditions are still likely to be expected throughout the year.  

3. The outlook: RBA to remain hawkish for now... 

Today's expected hike will likely be accompanied by the existing guidance that the Board "expects to increase interest rates further over the period ahead". Despite raising rates at every meeting going back to May last year, the RBA's message will be that there are still inflation risks it needs to guard against. Unless the Board wants to signal a change in its reaction function, it will leave the door open to a pivot by continuing to note that rates are "not on a pre-set course" and will depend on the data and its implications for the outlook. Given the growth outlook, the reference to the Board keeping the economy "on an even keel" as it lowers inflation remains appropriate.  

Australian retail sales -3.9% in December; Q4 volumes -0.2%

Australian retail sales unwound sharply in December following Black Friday sales. Sales volumes fell for the first time since the Delta lockdowns in 2021, though household consumption looks to have continued to be driven by the post-Covid rebound in services over the final quarter of the year. There was a welcome slowing in retail prices in the quarter due to Black Friday discounting and food prices holding flat.   

Retail Sales — December | By the numbers 

• National retail sales saw a 3.9% pullback in December to $34.5bn following a Black Friday-boosted 1.7% rise in November. Retail spending lifted by 0.9% in the December quarter. 
• 12-month retail sales were little changed at 7.5% from 7.7% in November.

• Quarterly retail sales volumes declined by 0.2% in Q4, a smaller than expected fall (-0.5%), but down from the prior quarter (0.3%) and its weakest outturn since the Delta lockdowns in Q3 2021.
• Year-ended volume growth decelerated sharply from 9.9% to 1.8%, as the reopening-driven surge from Q4 2021 (7.8%) fell out of the calculation.
• The retail price deflator saw its slowest quarterly rise in a year (1.1%) reflecting the effects of Black Friday discounting and falls in fruit and vegetable prices. 

Retail Sales — December | The details  

As reported last week, Australian retail sales fell by 3.9% in December unwinding from a strong rise in November (1.7%) as households took advantage of Black Friday discounting in the run-up to Christmas. Over the final quarter of the year, retail spending increased by 0.9%, but prices increased by more (1.1%) resulting in a modest 0.2% fall in underlying volumes. That was the weakest outcome since the Delta wave lockdowns in Sydney and Melbourne drove a 3.7% fall in national volumes in Q3 2021. Growth in retail volumes slowed sharply from 1.6% in the first half of 2022 to 0.1% in the second half, likely reflecting consumption moving back to services as the effects of the pandemic dissipated.  

Discounting for Black Friday sales and falls in fruit and vegetable prices following the easing of supply-related impacts from earlier flooding saw retail price pressures cool during the December quarter. The retail price deflator slowed to a 1.1% rise in the quarter, but the annual rate remained above 7%. 

Discretionary categories drove the decline in retail volumes (ex-food volumes fell by 1.6%q/q), but this was largely offset by the first rise in food volumes in 5 quarters (2.1%q/q). Food prices were flat overall in the quarter after accelerating in recent quarters. The fact purchasing power at the supermarket stopped deteriorating looks to have been reflected in higher volumes. 

The declines in volumes in the discretionary categories in Q4 were mostly in the order of 2-3% (see summary table above). The one exception to this was cafes and restaurants, which held broadly flat (0.3%) and was likely still being supported by the post-Covid rotation to services spending, particularly with holiday travel very strong over the summer holiday period. 

Across the states, momentum in retail demand has either flattened out or is now softening from the run-up seen over the Covid period. In the most recent quarter, Queensland saw the largest fall in volumes (-0.6%) followed by declines of 0.3% in Victoria and Western Australia. Volumes in New South Wales held up against the national result seeing a modest rise (0.2%).   

Retail Sales — December | Insights

Retail demand slowed sharply over the second half of the year, posting a small decline in Q4 (-0.2%). This partly reflects the rotation in consumption to services as the effects of the pandemic faded over the course of the year. Still, cost-of-living pressures are also likely to have factored in weaker retail demand. Price pressures in the retail sector are unlikely to be anywhere near as severe in 2023 due to the combination of weaker demand and the easing of constraints in global supply chains. 

Macro (Re)view (3/2) | Light at the end of the tunnel

Sentiment remained upbeat in markets this week on the expectation that the end is in sight for rising interest rates despite the Federal Reserve, European Central Bank and the Bank of England all retaining hawkish messaging at their respective policy meetings. Headline inflation rates are easing but central banks remain cautious with underlying price pressures yet to abate. The improvement in global growth prospects that has been a key factor driving markets so far in 2023 was reflected in the IMF's latest outlook.  

Fed tightening nears the end of the line  

The Federal Reserve's policy-setting committee is approaching the latter stages of tightening monetary policy in the US, downshifting the pace of its latest rate hike to a conventional 25bps increase at this week's meeting. The fed funds target now stands in the 4.5 to 4.75% range, a level close to being "sufficiently restrictive" to lower inflation but still requiring "ongoing increases" to reach that endpoint. In the post-meeting press conference, Fed Chair Powell said that positive real rates across the yield curve indicated settings were already restrictive and it was now a matter of judgment regarding the extent of further tightening that is appropriate. A stunning update on the labour market that saw 517k added to nonfarm payrolls in January topped all estimates by a large margin and led to market pricing coming into alignment with the Fed's guidance for a peak rate above 5%. 

Beyond the near term, there remains a divergence of views for the policy outlook between the Fed (signaling it intends to maintain rates at restrictive levels) and markets (expecting rate cuts later in the year), due to differing assessments of inflation stickiness. The market view has led to eased financial conditions - seemingly at odds with the Fed's policy ambitions - though Chair Powell instead highlighted that financial conditions had tightened "very significantly" since early 2022. 

Ultimately, it will be inflation developments that determine the path for Fed interest rates. Chair Powell said a disinflationary pulse was beginning to turn the tide on inflation, though it had mainly been concentrated in the goods sector as supply chain pressures had been resolved. The Committee anticipates housing-related inflation to unwind over the course of the year reflecting leading indicators on rents. However, Chair Powell said inflation in the services sector was yet to show signs of abating, which warranted keeping rates restrictive "for some time". 

Wage pressures are a key driver of services inflation, though the Fed would have taken some comfort from a softening in both the Employment Cost Index in Q4 (1%) and in average hourly earnings growth in January (4.4%yr). Chair Powell said there were ways in which wage pressures could ease aside from rising unemployment. In that sense, an uplift in labour force participation (62.4%) alongside a decline in the unemployment rate to 3.4% (its lowest since 1969) was a very welcome development. 

ECB signals more hikes ahead leaving markets unconvinced  

Aggressive tightening from the European Central Bank continued this week as the Governing Council hiked the key rates by 50bps and signalled its intent to press on from there. The plan to commence reducing the balance sheet in March was also reaffirmed. The meeting statement noted the intention is to hike by 50bps again in March but to then "evaluate the subsequent path" for rates based on revised growth and inflation forecasts. In the post-meeting press conference, President Lagarde said underlying inflation pressures left the ECB with more work to do to reach "sufficiently restrictive" levels. That came as January's preliminary inflation estimates showed a cooling in the euro area headline rate from 9.2% to 8.5%yr but the underlying rate holding steady at 5.2%yr. 

Markets were left unconvinced by the ECB's hawkish messaging, honing in on references to data dependency in the statement and throughout the press conference. The rates guidance also appeared to clash with the ECB's assessment that the inflation outlook was now "more balanced" than in December due to falling energy prices. From a growth perspective, the euro area economy proved resilient over the back half of the year - the initial estimate for Q4 GDP growth held up at 0.1% - and PMIs have returned to expansionary territory in early 2023. However, the impact of rate hikes is gaining momentum as the ECB's Bank Lending Survey reported a further substantial tightening of credit standards for households and firms. Meanwhile, the war in Ukraine continued to pose a "significant downside risk" to growth prospects.    

BoE softens hawkish guidance as inflation turns the corner 

The Bank of England's Monetary Policy Committee (MPC) voted 7-2 to hike rates by 50bps to 4.0% but gave indications that the tightening cycle is nearing its conclusion. The newly published Monetary Policy Report contained revised forecasts that now project a much shallower downturn in the economy in the year ahead (-0.7% from -2%) and a faster decline in inflation due largely to falling energy prices. Inflation is now expected to fall back below the 2% target in Q2 next year, brought forward from Q4 2024 previously.  

Source: Bank of England February Monetary Policy Report 

In the post-meeting press conference, Governor Bailey said while there were encouraging signs that inflation had "turned the corner", the MPC was still guarding against the risk of inflation not converging to this more rapid path back to target. That reasoning justified the 50bps rate hike; however, two key changes made to the MPC's meeting statement signal a softer approach ahead. The guidance for both "further increases" in rates and the pledge to "respond forcefully" was removed and replaced with a line that "...evidence of more persistent pressures" on inflation stemming from the labour market and the services sector would require "further tightening in monetary policy". Markets have interpreted this to mean that rates are close to their peak and expect the size of any further hikes to slow to the more conventional pace of 25bps.  

RBA set to hike by 25bps as data deteriorates 

The RBA returns from its summer break next week where a 25bps rate hike to 3.35% is widely expected. Markets anticipate the peak rate is approaching and will look to the RBA's updated growth and inflation forecasts for validation. Rates have risen by 300bps since last April and the effects continue to play out in the housing market. Housing prices continued to unwind from their Covid peak in January, while housing finance commitments (see here) and dwelling approvals (see here) have fallen sharply over the year. But it was retail sales that surprised this week as December sales were jolted 3.9% lower (see here). This reflects an unwind in discretionary spending after a Black Friday-boosted rise in November and similar declines were seen in December 2020 and 2021. However, this could also be signalling a slowing in the momentum of household spending. 

Australian housing finance extends decline into year end

Australian housing finance declined for the 11th month running in December. Commitments have fallen by 31% from their peak in early 2022 as RBA rate hikes and tighter loan assessment criteria have impacted. House prices nationally are running about 10% below their COVID peak but are likely to see further falls.  

Housing Finance — December | By the numbers

• Housing finance commitments (ex-refinancing) fell by 4.3% in December to $23.4bn, a decline of 29.3% over the year. Commitments were down by a similar magnitude in November (-4.2%).   
• Owner-occupier commitments contracted by 4.2% over the month to $15.6bn (-29.8%yr), back to levels last seen around the outset of the pandemic in 2020.  
• Investor commitments posted a 4.4% fall to $7.9bn (-28.3%yr), a 21-month low. 
• Refinancing eased in December (-1.5%), but the level remained around record highs at $19.1bn, an elevation of 18% since December 2021. 

Housing Finance — December | The details 

The value of housing finance commitments continues to fall reflecting the effects of rising interest rates, tighter loan assessment criteria, and declining housing prices. Commitments have now fallen for 11 months running, with December's total ($23.4bn) almost 31% below the January-22 peak ($33.8bn). Both the owner-occupier (-31.9%) and investor segments (-30.6%) have seen unwinds of similar magnitudes from their respective cycle peaks. 

In the December quarter, commitments fell by 10.6% following an 11.7% decline in Q3. The owner-occupier segment (-11.3%q/q) saw a larger fall than investors (-9.0%q/q), but both have now declined for 3 quarters in succession and are contributing to the downswing.  

The volume of loan approvals to owner-occupiers is unwinding at a similar pace to the value of commitments, indicative of weakening demand from higher interest rates. The upgrader segment saw an 11.7% fall in loan volumes in Q4, with the value of approvals down by 11.4%. Construction-related loan volumes contracted 12% in Q4 and 11.1% in value terms. Volumes coming through in the first home buyer market were down by 8.6% in the quarter, registering as a 7.9% fall in commitments. 

The backdrop of rising interest rates has seen refinancing activity resetting to record highs since the RBA commenced its hiking cycle in May. Although there was a slight decline in December (-1.5%), the value of refinancing was only just below record highs. This has been mainly led by owner-occupiers (21.2%yr). Refinancing to investors is up 11.7% over the year but is below the previous peak in August-21. 

Housing Finance — December | Insights

Rising interest rates and tighter loan serviceability criteria are having a major effect on the Australian housing market. According to CoreLogic, housing prices were down by a further 1% nationally in January, the 9th consecutive decline. Prices are down by 8.9% from the cycle peak in April-22 and this is likely to widen further yet.   

Australian dwelling approvals down 4.3% in the December quarter

Australian dwelling approvals lifted in December on the back of rises in unit approvals in Sydney and Melbourne. Approvals, however, were down more than 4% in the quarter as house approvals weakened sharply in response to RBA rate hikes and declining housing prices. 

Building Approvals — December | By the numbers

• Dwelling approvals (seasonally adjusted) lifted 18.5%m/m to 16,556 in December (-3.8%yr); the market consensus was for a 1% rise, while approvals in the prior month were revised from -9% to -8.8%.

• House approvals saw their 4th decline in succession falling by 2.4% in the month to 8,989 (-12.2%yr).

• Unit approvals surged higher (58.8%) to 7,567 (8.7%yr) on the back of a wave of approvals coming through in New South Wales and Victoria. 

Building Approvals — December | The details  

Dwelling approvals posted an 18.5% rise in December driven by the lumpy unit segment (58.8%). However, approvals fell by 4.3% in the final quarter of 2022 incorporating declines in October (-5.6%) and November (-8.8%). Quarterly dwelling approvals (45,854) slid to their lowest level since Q3 2020. The headwinds from falling housing prices and RBA rate hikes appeared to impact approvals in the house detached segment where approvals contracted by 7.5% in Q4. Higher-density approvals were up slightly over the most recent quarter (0.9%) quarter but are flat since Q4 2021 (-0.1%). 

House approvals are sliding across the nation, with falls over the quarter ranging from 3.2% in New South Wales to 11.5% in Queensland. Based on the monthly figures for December, house approvals in most states have declined by around 10% over the year, though the decline has been larger in Western Australia (-17.6%). 

Smoothing out the month-to-month volatility, higher-density approvals have appeared to be more insulated from the early headwinds that have impacted the detached segment. Higher-density living fell out of favour during the pandemic and approvals in this segment did not see the upsurge that detached houses did through the economic recovery phase as the construction stimulus measures that flowed were generally directed towards boosting detached home building. The overlay of border closures further hampered higher-density approvals. 

Looking at the major capitals in Sydney and Melbourne, the flow of higher-density approvals has picked up over recent months, though Sydney saw a slowing towards year-end (top panel chart). In Melbourne, higher-density approvals have been rising as house approvals have rolled over (lower panel chart).   

In the non-residential segment, the momentum in approvals appeared to lift over the back half of 2022. However, these are nominal figures and so include the inflationary effects on commercial building costs. 

Building Approvals — December | Insights    

Detached approvals are weakening reflecting the interest sensitivity of the sector to the RBA's rate-hiking cycle. Developers may also be holding back from bringing forward new stock due to the high volume of work underway, particularly with housing prices now in a downswing phase. House approvals are down almost 40% from their 2021 peak, which will assist in easing inflationary pressures on home building costs over the course of the year. The higher-density segment appears to be holding up for the moment and could potentially improve as the uncertainty over migration dissipates post the pandemic.