Preview: Wage Price Index Q4

Australia's Wage Price Index (WPI) for the December quarter is due at 11:30am (AEDT) today. After accelerating in the previous quarter as increases to the minimum wage and awards came into effect, wages growth is expected to have moderated into year-end. Annual wages growth is likely around its peaks and the RBA forecasts it to slow from the middle of the year as labour market conditions ease.  

A recap: Wages growth accelerated sharply in Q3 

The WPI posted its fastest quarterly increase on record rising by 1.3% in Q3, lifting the annual pace from 3.6% to 4%, a high dating back to 2009. During Q3, wages growth accelerated as the increases to the minimum wage (8.6%) and award rates (5.75%) determined by the Fair Work Commission came into effect. This extended the rebound in wages growth from the lows reached during the pandemic, driven by very robust labour market conditions, adjustments to pay settings and high inflation. 

Sizeable contributions to wages growth in Q3 came from new enterprise bargaining agreements and awards. In addition, individual agreements also boosted wages growth but by a similar magnitude to the same period a year earlier. 

In the private sector, base wages lifted by 1.4% in the quarter to be up by 4.2% through the year. By contrast, wages growth in the public sector has lagged through the cycle rising by a more modest 0.9% in the quarter to 3.5% in annual terms. This reflects the effects of pay caps on public sector wages, policies that have been superseded over the past year or so.  

Wages growth to moderate in the December quarter

The wage-setting process in Australia conforms to a seasonal pattern where most jobs receive pay increases in Q3, following the completion of the previous financial year. This can be seen in the 'Methods of Pay Setting' chart above. Wages growth then typically eases in Q4. As a result of this, markets forecast wages growth to moderate to a 0.9% rise in the quarter (range: 0.8% to 1.1%), which would hold the annual pace at 4%.

In its recent Statement on Monetary Policy, the RBA forecast that wages growth is currently around its peaks for the cycle. Its outlook for the labour market is for conditions to ease such that the unemployment rate rises to around 4.5% over the next couple of years. This easing of the labour market is anticipated to result in wages growth slowing to the 3s by the end of the year, and this is backed by insights picked up in the Bank's Liason program. 

RBA chart

Macro (Re)view (16/2) | Easing expectations continue to shift on data

Signs of slowing disinflation in the US has markets sensing the Fed will be in no rush to remove restrictive monetary policy settings. Markets remain convinced easing cycles will occur in the US and other countries this year, but the timing and extent of rate cuts expected continues to swing around on the incoming data. Higher bond yields weighed on US equities whereas Japan's Nikkei continued to surge and Europe also advanced. 

Fed rate cut expectations continue to be wound back, with the catalyst this week being upside surprises in January's inflation data. Headline CPI (0.3%m/m) eased from 3.4% to 3.1%yr while the core rate (0.4%m/m) was unchanged at 3.9%yr, both coming in above consensus for 2.9% and 3.7% respectively. Slower disinflationary progress in January was reinforced by a stronger-than-expected lift in producer prices of 0.3%m/m. As a result, between 3-4 rate cuts are now priced for 2024, well down from the 7 cuts that were being discounted just a few weeks ago. This also brings market pricing closer to the Fed's signalling of 3 cuts for 2024. Inflation in January was driven by components such as services (0.7%m/m, 5%yr) and housing (0.6%m/m/6.1%yr), viewed by some as being indicative of the strength in the US labour market and domestic demand more generally. By contrast, goods inflation is very weak (-0.3%m/m/0.1%yr). 

The emphasis of policymakers at the ECB and BoE remains on inflation over growth. GDP growth in year-ended terms to Q4 was 0.1% in the euro area and -0.2% in the UK. Growth has been on a similar trajectory in both economies, slowing materially over the past year as the recovery from the pandemic has given way to binding pressures on consumption from high inflation and rising interest rates. In the UK, 12-month headline and core inflation held 4% (vs 4.1% exp) and 5.1% (vs 5.2%) respectively in January. Inflation is well down from its peaks (11.1% headline and 7.1% core), progress welcomed by BoE Governor Bailey at the House of Lords; however, this came with the caveat that services prices (6.5%yr) and earnings growth (6.2%yr) remained inconsistent with a return to 2% inflation. Similarly, the ECB President Lagarde told the EU Parliament that wages growth was expected to "become an increasingly important driver of inflation dynamics in the coming quarters".       

Seasonal volatility continues to cloud visibility over conditions in the Australian labour market. Employment failed to rebound from December's surprising decline (-62.7k) rising by just 0.5k in January, well below expectations for a 25k increase (full review here). With the participation rate steady (66.8%), the unemployment rate pushed up from 3.9% to 4.1%, a 2-year high. 

My interpretation is that the weakness in December and January is overstated and will reverse over the coming months - the ABS highlighted more than 200k will enter new jobs from February - but if this doesn't come to fruition, then the risk is that the RBA is behind the curve having left its tightening bias in place after assessing the labour market as being tight and an excess of demand in the economy. The survey data published this week only added to the uncertainty. Consumer sentiment (Westpac-MI index) picked up sharply by over 6% in February, but the NAB Business Survey for January reported ongoing weakness in confidence and a softening in trading conditions. 

Australian employment 0.5k in January; unemployment rate 4.1%

Australia's unemployment rate lifted through 4% in January for the first time since 2022. Employment (0.5k) came in well below expectations, but was likely held back by the peak summer holiday season. Significant volatility within the data relating to changing seasonal patterns post the pandemic is making it difficult to obtain a clear read on the underlying conditions.  

By the numbers | January

• Employment lifted by just 0.5k on a net basis in January, disappointing expectations for a 25k rebound following December's steep fall (-62.7k revised from -65.1k).  
• The headline unemployment rate lifted from 3.9% to 4.1% (vs 4% exp), its highest in 2 years. Underemployment rose from 6.5% to 6.6%, resulting in the total underutilisation rate increasing from 10.4% to 10.7%, a high back to January 2022.

• Labour force participation did not rebound after falling in December, remaining at 66.8%.

• Hours worked fell sharply by 2.5%m/m, slightly steeper than the decline seen at the same time a year ago (-2.1%). 

The details | January 

The January labour force survey has disappointed markets coming off the back of December's weak report. This is not overly surprising because the timing of the survey coincided with the peak summer holiday period. I felt this was a factor that could hold back the expected rebound markets were looking for, referring to today's report in my preview as a wildcard. It was also another indication that the statistician's seasonal adjustment processes are struggling to account for the shifts in activity that are occuring around this time of year in the post-Covid economy. Granted these are very technical details, but they give important context to what is now two weak labour market updates in succession.

Employment was soft in January (0.5k) around broadly offsetting movements in the full time (11.1k) and part time segments (-10.6k). While this looks disappointing after December's sharp fall (-62.7k), recall that in January 2023 employment was intially reported to have declined by 11.3k only to be later revised to a 25k increase. 

Another factor to consider is that the ABS reports more than 200k people (not currently in the labour force) were waiting to start a new job in January. This is substantially higher than was seen, on average, in the years prior to the pandemic (2016-2020) and will boost employment (and participation) in the coming months. Given all the issues around the data, it is best to reserve judgment in assessing the momentum of employment growth. 

ABS chart

Although the unemployment rate held steady at 3.9% in December despite employment falling by 62.7k, this month it pushed up to a 2-year high at 4.1% on a near-flat employment outcome. The swing factor was the participation rate; in December it dropped sharply from a record high (67.3%) to 66.8%, then - with many people on summer holidays - it failed to rebound in January. Again, this speaks to the volatility at play in the data.  

The effect of summer holidays on the labour market was most evident in a large 2.5% fall in hours worked in January. This was in the ballpark of the decline seen in January 2023 (-2.1%). With many people away from work, this will have weighed on hiring through the early part of the year. 

In summary | January

Seasonal volatility in the data clouds visibility around the underlying dynamics in the labour market. I am optimistic that employment can return to the solid momentum seen through the back half of 2023, which if it can, the unemployment rate would largely track sideways at what are still low levels historically. But if this doesn't prove to be the case, then the RBA's assesment of excess demand in the economy simply wouldn't be consistent with an unemployment rate rising faster than it has forecast, a scenario that would bring rate cuts firmly into focus. 

Preview: Labour Force Survey — January

Australia's Labour Force Survey for January is due at 11:30am (AEDT) today. Coming off a surprisingly weak end to last year, labour market activity is expected to have rebounded in early 2024. Seasonal volatility likely played a role in December and given January is the peak summer holiday period, this could remain a factor in today's report. Markets forecast employment to partially recover after declining sharply in December, though the unemployment rate may rise to 4% for the first time since early 2022.

A recap: A weak finish to 2023

The December report shocked all comers as employment fell by a net 65.1k (vs +15k expected), its weakest outcome since the Covid lockdowns in 2021. The decline came entirely in the full-time segment (-106.6k), with part-time employment increasing (41.4k). December's outcome was a sharp surprise after strong employment gains were posted in October (44.2k) and November (72.6k). Volatility in the December print and in a range of other data points has raised suggestions that the statistics bureau may be having some difficulties with its seasonal adjustment processes at this time of year in the post-Covid economy.

A large fall in the participation rate to 66.8% from a record-high in November (67.3%) enabled the unemployment rate to remain at 3.9%, despite the sharp employment decline. Outside of the Covid period, a monthly decline of this magnitude has rarely been seen over the history of the series. Alongside a steady unemployment rate, the underemployment rate (6.5%) was also unmoved, leaving total underutilisation unchanged (10.4%). 

Rounding out a very weak report, hours worked contracted by 0.5% month-on-month to be down by 0.4% over the final quarter of the year. Coming out of the pandemic, hours worked rebounded strongly, but growth has cooled over the past year (1.2%) as the economy has slowed. 

A mixed start to 2024 is expected...

Employment is forecast to rise by 27.5k on the median estimate, partially reversing the December fall. The range of estimates sits between 10k to 55k, reflecting that this could be another volatile outcome. Visibility is limited and the ABS's payrolls series - often a lead indicator for the monthly employment outcome - remains out of publication for the time being. Based on the expectation that the participation rate will rebound, the unemployment rate is forecast to lift from 3.9% to 4% (range: 3.8% to 4.1%). The unemployment rate last printed with a 4 handle in February 2022.  

... but there is a lot of uncertainty around today's report

Today's report shapes as a wildcard. The weak detail in the December report could be reversed; however, January is also the peak summer holiday season and this may hold things back. All in all, today's report is unlikely to be a game-changer. Last week, the RBA articulated its assessment of the labour market and updated its economic outlook. The RBA anticipates the unemployment rate to rise to 4.3% by year-end, reflecting cooling employment growth in a slowing economy being unable to match pace with growth in the labour force. This easing of conditions - the RBA believes - is required for inflation to be sustainably held within the 2-3% target band.     

Macro (Re)view (9/2) | Reading from the same sheet

A lull of major events saw markets trading narrow ranges this week. On the equity front, the US has pushed up to new record highs while support from the authorities in China boosted its beleaguered markets. A broadly similar message came from policymakers across the US, Europe and Australia this week cautioning against early rate cuts. Bond yields were modestly higher in response. 

A host of officials from the Federal Reserve--led by Chair Powell--gave the impression that more confirmation of disinflationary trends was needed to conform a consensus that rates can start to be eased from their peaks. This starts with next week's January CPI report, while annual revisions to CPI readings in 2023 proved very minor and so did not alter the narrative around cooling US inflation. Comments from the ECB's Schanbel to the FT were consistent with her earlier statements that the 'last mile' in bringing inflation back to target is likely to prove the most difficult.   

Markets have pushed back pricing for rate cuts in Australia to the second half of the year following the suite of RBA developments this week. The Board held the cash rate unchanged at 4.35%, highlighting that this setting is working to slow growth and bring down inflation - encouraging signs given its assessment of excess demand in the economy. The meeting is covered in more detail here, but the key takeaway was that the Board wants to see more progress before thinking about rate cuts. That said, the Board did tweak its guidance in such a way that neither rules further hikes in or out, a softening in its stance from a clear tightening bias.   

An outlook for slower growth and lower inflation published in the Statement on Monetary Policy appears to have prompted this shift. But in the baseline outlook, inflation is not seen returning to the midpoint of the 2-3% target band until mid-2026. Appearing before a parliamentary committee, Governor Bullock said said there remained a lot of uncertainty around the inflation outlook - in particular regarding services prices - and that the Board needed more data to give it confidence that inflation is on track to return to the target band on a sustainable basis. In light of this, current pricing has the first RBA rate cut coming in August. This looks reasonable given it would allow the Board to take in the inflation reports for Q1 and Q2 and watch the other data come in over the first half of the year. 

RBA holds in February

The RBA held the cash rate unchanged at 4.35% at its first meeting for 2024 today. A tweak was made to the Board's guidance softening its tightening bias, though it maintains that "a further increase in interest rates cannot be ruled out". This is despite new forecasts showing an outlook for slower growth and lower inflation. The declines in Australia's headline (4.1%) and core (4.2%) inflation rates were welcomed by the RBA, but the message from Governor Bullock was that this progress needs to continue and that rate cuts are not on its mind. Markets remain priced for the RBA to deliver 2-3 rate cuts this year. 

Overall, the tone of today's meeting, the Statement on Monetary Policy, and the press conference could be summarised as cautious. I had been of the view that the RBA would remove its tightening bias, but the Board was not ready to make that shift yet. The new line: "The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks, and a further increase in interest rates cannot be ruled out" allows the Board to retain optionality; it could hike again, but it does not dismiss that rates may have peaked either - the more likely scenario. 

The key judgment from the Board is that there remains excess demand in the economy, pointing to a tight labour market and elevated services inflation. Given this, the Board remains highly alert to inflationary risks. The statement noted that higher interest rates were continuing to rebalance supply and demand, essentially highlighting that it believes the labour market needs to soften further to sustainably deliver inflation within the target band. 

The updated set of forecasts published by the RBA contained few surprises, though it is worth noting that one of the conditioning assumptions is for around 4-5 rate cuts between mid-2024 to mid-2026, based on market pricing and economist surveys. The growth outlook was downgraded for 2024 (2% to 1.8%) and 2025 (2.4% to 2.3%), resulting in a slightly higher peak in the unemployment rate by mid-2025 (4.4% from 4.3%). Following the Q4 CPI report, the inflation outlook has been lowered over the next couple of years; however, both the headline and core rates aren't seen returning to the midpoint of the target band until mid-2026. The next RBA meeting is set for 18-19 March.    

Australian retail sales volumes rise 0.3% in Q4

Australian retail sales volumes lifted by 0.3% in the December quarter - its strongest rise since Q2 2022 and above market expectations (0.1%) - as households took advantage of discounting during the Black Friday and Boxing Day sales. Retail price growth cooled to its slowest annual pace in 2 years; there have been small outright price declines in a few goods-related categories over the past year.

Black Friday and Boxing Day sales gave households some respite from cost-of-living pressures, generating a demand response in some areas of the retail sector. Sales volumes lifted by 0.3% in Q4 but have contracted by 1% through the year. Household goods (2.3%) drove the rise in quarterly volumes, with modest gains coming through for other retailing (0.4%) and department stores (0.2%). Basic food increased solidly (0.5%). These rises were moderated by falls in clothing and footwear (-1.6%) and cafes and restaurants (-2.1%), the latter seeing its sharpest quarter-on-quarter decline outside of the pandemic period in 13 years. 

Retail price inflation slowed materially, reflecting the effects of sales discounting. The quarter-on-quarter pace of retail inflation eased from 0.6% in Q3 to 0.1% in Q4, its softest outcome since Q3 2021. At an annual pace, retail inflation eased from 3.7% to 2.4%, a low back to Q4 2021. Over the past year, prices have declined slightly across household goods (-0.5%), clothing and footwear (-0.7%) and department stores (-0.8%). While price rises for food (4.1%) and cafes and restaurants (5.1%) have declined from their highs, they remain at an elevated pace, reflecting higher costs associated with food production and overheads.   

Aside from easing price pressures, retail demand has also been supported by population growth. Adjusting for this, retail volumes on a per capita basis declined 0.3%q/q (-3.5%Y/Y). This highlights the boost that population is providing demand, one reason why the labour market remains in robust shape. 

RBA February meeting preview: following the lead

The RBA steps out for its first meeting of the year today (decision due 2:30PM AEDT). The cash rate will remain unchanged at 4.35%, but this meeting is more about what the Board and then Governor Bullock in the post-meeting press conference communicates regarding future policy. Declining inflation and risks to the growth outlook have led markets to price in 2-3 rate cuts in 2024. The time has come for the RBA to remove its tightening bias, but expect it to remain cautious regarding the inflation outlook. 

Today's Decision 

Nothing other than an unchanged cash rate (4.35%) is expected today. The RBA last hiked rates in November before remaining on hold in December. Over the summer, easing cycles have continued to be priced into overseas markets as inflation readings cooled substantially into the end of 2023. A similar dynamic has emerged in Australia, with markets now pricing 2-3 RBA rate cuts this year. This is a material shift from the December meeting, from which the minutes noted "... expectations for policy rates in other countries had eased significantly... while being little changed for Australia". 

The reappraisal of the rates outlook in Australia reflects declining inflation and headwinds to economic growth. Headline and core inflation slowed to 4.1% and 4.2% respectively in year-ended terms in the December quarter, printing below RBA forecasts for 4.5% on both measures. The Q3 National Accounts highlighted that household consumption has slowed notably under the weight of cost-of-living pressures and higher interest rates. The labour market remains robust but conditions have eased; the unemployment rate averaged 3.9% over Q4, up from a cycle low of 3.4% a year earlier.   

Policy Guidance 

The RBA started raising rates back in May 2022 and has maintained a tightening bias in varying forms ever since. Last week, the Federal Reserve and Bank of England (BoE) formally removed their tightening biases, and for a data-dependent RBA, the moment has arrived for it to make a similar shift. I think the BoE outlined a path the RBA may be able to emulate. Here, the BoE removed its reference to "further tightening" but reaffirmed that restrictive monetary policy was still required to return inflation to target and that its focus would now turn to "... how long Bank Rate should be maintained at its current level". 

The importance of today should not be lost. Following the missteps of recent years, the RBA Review prompted the central bank to make efforts to improve its communications, including establishing a separate department to provide advice to the Board in this area. The new regime will want to make a good start, delivering clear and credible guidance. This necessitates removing a tightening bias that has exceeded its used-by date. 

Economic Forecasts 

For the first time, the RBA will publish its quarterly Statement on Monetary Policy alongside the rates decision - another effort to improve communication around policy decisions. Previously, the SoMP was released 3 days after the relevant meeting. The SoMP contains the RBA's economic and inflation forecasts, a key input for the Board in setting monetary policy. Three points stand out regarding the new set of forecasts: 

• The inflation forecasts will need to be revised lower following the Q4 CPI report, though the RBA is likely to be cautious around the timeline for the return to the midpoint of the 2-3% target band, potentially not projected before end-2025. 

• Risks to the growth outlook appear to be to the downside, with the RBA having underestimated the effects of cost-of-living pressures and higher interest rates on household consumption in the Q3 National Accounts. Rising income tax has also been another headwind to households. The changes to the Stage 3 tax cuts will definitely come up in the post-meeting press conference, but they aren't likely to have materially changed the RBA's outlook beyond what was already factored in. 

• Conditions in the labour market and wages growth have broadly tracked in line with the RBA's earlier forecasts, pointing to minimal revisions.

Australia's trade surplus $11bn in December

Australia's surplus on goods trade was around $11bn in December, narrowing less than expected ($10.5bn) from November's $11.8bn figure. A rebound in import spending (4.8%) outpaced exports (1.8%), the latter up for the third month in succession. Exports (2.8%) and imports (-2.9%) posted broadly offsetting movements in the final quarter of 2023.  

The nation's trade surplus came in around $11bn in December, narrowing from an 8-month high of $11.8bn in November (revised from $11.4bn). Over the December quarter, the surplus widened by $7.1bn to $30.1bn, driven by increased export revenue from higher prices and a decline in import spending on softer demand. 

Exports rose by 1.8% month-on-month in December ($47.1bn), driven largely by volatile non-monetary gold (20.2%m/m). Both non-rural (0.9%) and rural goods (0.5%) also advanced. For the quarter, exports were up by 2.8%, but this looks to reflect higher prices; last week the ABS reported export prices increased by 5.6% in Q4, implying a contraction in volumes terms. The quarterly increase in export revenue was driven by non-rural goods (4.7%) on sizeable boosts from iron ore (8.2%) and coal (5.1%). Both these commodities saw large price rises in Q4, according to last week's data: iron ore 7.4% and coal 11.6%. 

Import spending saw a 4.8%m/m rise to $36.2bn, rebounding after large falls in October (-3.5%) and November (-8.4%). The swing came from consumption goods (9.8% from -13.5% in November) on the back of vehicle imports. Overall, imports declined by 2.9% in the quarter. The ABS reported a 1.1% decline for Q4 import prices, pointing to a contraction in volume terms. The major contributors to lower quarterly spending on imports were consumption (-6.8%) and capital goods (-5.3%). Weaker demand looks to be behind these declines, with prices for consumption goods rising (2%q/q) and holding broadly flat for capital goods (0.1%q/q).  

Macro (Re)view (2/2) | Fed and BoE enter holding pattern

Pushback from the Federal Reserve to early rate cuts was vindicated by a very strong employment report for January, but this (and other headwinds) did not unsettle high-flying US equities, closing the week at or near record highs. These factors saw the US dollar strengthen across the board. The Fed's FOMC left rates unchanged in the 5-25-5.5% range this week, though the statement removed the reference to "additional policy firming" as the Committee judged that the risks to its "employment and inflation goals are moving into better balance". In the post-meeting press conference, Chair Powell said that a rate cut by the next meeting in March was unlikely, with more data needed to shore up confidence in the outlook for a return to sustainable 2% inflation.

This, arguably, could take longer for the FOMC to come to this assessment after nonfarm payrolls surged by 353k in January, nearly double the expected increase. Strength in employment and an unchanged participation rate (62.5%) saw the unemployment rate hold at 3.7% (vs 3.8% exp). A lift in average hourly earnings growth from 4.2% to 4.5%yr suggests inflationary risks remain. However, the FOMC will likely be giving greater weight to an easing in the Employment Cost Index in Q4 (4.4% to 4.1%Y/Y). Meanwhile, rising productivity (2.7%Y/Y) sees unit labour costs (2.3%Y/Y) at a pace nearly consistent with FOMC's inflation target.    

A shift in tone from the Bank of England's MPC has effectively signalled the peak for rates and given the nod to rate cuts as the next move. In a vote that was split 3 ways - seen at the margin as a more hawkish element of the meeting (2 members voted to hike) - a clear majority of 6 members sided with holding rates at 5.25%, a level that will now be maintained after the MPC threw in the towel on its guidance to deliver "further tightening". In the post-meeting press conference, Governor Bailey said that the incoming data would determine how long it would be before rates can start to be lowered. New forecasts published in the February Monetary Policy Report took into account the cooling in recent wage and inflation readings, with the MPC inclined to assess that the risk of inflation overshooting its estimates at a policy-relevant horizon of 2-3 years had abated. In the euro area, January's inflation figures slowed less than expected: headline 2.8%yr (vs 2.7% exp) from 2.9% previously and core 3.3% (vs 3.2%) from 3.4%; however, this did not shift markets from pricing 5-6 ECB rate cuts this year.  

Australia's December quarter CPI outcomes printed below market and RBA forecasts. Ahead of its first meeting of the year next week, the RBA - still with a hiking bias in place - is looking at markets that are now pricing earlier rate cuts; something will have to give. Slowing inflation overseas is filtering through to Australia while other factors such as cost-of-living support measures and Black Friday sales saw headline CPI falling from 1.2%q/q in Q3 to 0.6%q/q in Q4, driving the annual pace down from 5.4% to 4.1%, a 2-year low. Importantly, the core rate (0.8%q/q) also softened from 5.1% to 4.2% year-on-year, accompanied by signs that sticky price pressures emanating domestically are easing, reflected in declining non-tradables (6.2% to 5.4%Y/Y) and services inflation (5.8% to 4.6%Y/Y). My full review of the CPI report can be accessed here. For those interested, I also have reports for the other key Australian data points released through the week, including a post-Black Friday unwind in retail sales (see here); building approvals retracing to their lowest annual total in 11 years (see here); and housing finance rising strongly in Q4 despite seeing a 4.1% fall in December (see here). 

Australian housing finance declines 4.1% in December

Australian housing finance commitments declined by 4.1% in December ($26.3bn), their first decline in 5 months and their weakest result since November 2022. The decline reflected weaker loan volumes going through in the month; however, despite higher interest rates - including a 25bps hike in November - banks' mortgage books expanded further during the quarter as demand remained underpinned by population growth. This has driven commitments to an increase of 15% from their cycle low in early 2023, while capital city housing prices are up by 10% over the year, according to CoreLogic.  

Housing finance commitments fell for the first time in 5 months, declining 4.1% in December to $26.3bn. A 5.6% decline in owner-occupier commitments ($16.8bn) was the segment's sharpest month-on-month fall since the outset of the Covid pandemic. Meanwhile, the investor segment was down 1.3%m/m ($9.5bn), posting its first decline in 10 months. 

December's decline came after increases of 7.3% in October and 0.7% in November, leaving the value of commitments up by 8.3% for the final quarter of 2023. Lending increased to both owner-occupiers (8.7%) and investors (7.7%) over the period.  

In the owner-occupier segment, loan approvals in December fell by a little more than 8%m/m to upgraders and first home buyers. Construction-related approvals rose 1.2% but remain near 15-year lows. Through Q4, approvals increased across the board, consistent with rising demand for housing: upgraders 4.9%, first home buyers 9.4% and construction-related 5.4%. 

Refinancing was down 1.6% overall in December, seeing a decline of 13.4% in the quarter. With many fixed-rate borrowers having refinanced, activity in this space retraced over the back half of the year. 

Australian dwelling approvals slide to 11-year low in 2023

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

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

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

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

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

Source: CoreLogic