Garima Sinha 
Following hawkish comments from the Reserve Bank of Australia and a rise in monthly CPI indicator readings in the last two months, markets are pricing in a higher probability that the RBA will hike interest rates at its next meeting in August. We think this speculation is overblown.
As expected, the RBA kept rates on hold in August. The cash rate has now been unchanged at 4.35% since November last year. The August meeting looked set to be a close-run decision before the release of the Q2 CPI, which surprised slightly to the downside. The RBA’s statement remains vigilant against upside risks to inflation. But once again, the cautious and hawkish messaging has not been backed up with any action.
Employment growth has outstripped economic activity over the past 18 months to an unsustainable extent. Accordingly, the Australian economy has been facing a big question of when the labour market will slacken further, reflective of the substantial and well entrenched slowdown in the real economy.
Market conditions for the retirement living sector in Australia are robust, with occupancy rates having surged to 95% in 2023 – near the effective rate of full occupancy. This reflects a mix of strong demand drivers and lagging supply.
Higher interest rates have pushed up the risk premium required from prime commercial property. Yields have softened as interest rates and bond yields moved higher, resulting in falling capital values.
Following a strong FY2023, the past year has proven more difficult for the build-to-rent (BTR) sector. Unit commencements fell 19% to 5,290 in FY2024, with financing issues the core driver of this lull. Borrowing costs remain high, while institutional capital (particularly from overseas) has been harder to access given uncertainty around key policy tweaks.
The national total number of owner-occupier loans for dwellings (excluding refinancing) fell 2% in May to 26,880 loans in seasonally adjusted terms.
Following hawkish comments from the Reserve Bank of Australia and a rise in CPI inflation readings in the last two months, markets have increased their bets on the probability that the RBA will hike interest rates at its next meeting in August. We think this speculation is overblown.
With the current weakness in residential building and key commercial and industrial segments of non-residential building, growth in engineering construction has been a support for the construction industry and – given the multipliers involved – the broader economy. (Engineering construction covers transport, utilities and mining and heavy industry construction.)
Construction cost escalation has slowed from the unprecedented inflationary spike experienced by the sector in 2022 and 2023. The recent surge in construction costs was primarily driven by supply-side factors; commodity market volatility and the energy cost crisis has shifted up manufacturing and transport costs, compounded by supply-chain disruptions from the lingering impacts of the pandemic.
The conversion of underutilised low-grade office stock to residential dwellings is pushed as a carbon effective path to boosted housing supply and a more balanced office market. While a winwin in concept, in practice development potential is significantly limited.
The approvals lead for non-residential building continues to soften, with March quarter 2024 maintaining the recent downward trend in project approvals. While a normalisation beyond COVID continues to impact for some sectors, broader cyclical demand drags are becoming more obvious.
The most predictive near-term leads suggest net overseas migration (NOM) to Australia will hold near a record level for FY2024. We have conservatively revised upwards our expectation for NOM to 485,000 (+90,000).
The 2024/25 Federal Budget delivered little to shift the outlook for building construction, although there was modest movement connected to housing, tertiary education, manufacturing, and defence.
The 2024-25 federal budget affirmed the forecast changes we made in the April 2024 edition of our Engineering Construction in Australia (ECA) service. We continue to expect publicly funded activity to average $54.1bn over the five years to FY28, compared to an average of $42.1bn over the five years to FY23.
The Budget is more stimulatory than we had anticipated and presents some upside risk to an otherwise modest growth outlook in FY25. We had already bolstered our outlook a little following the redesign of the tax schedule. But the untargeted energy bill relief, expansion of rent assistance and student debt relief will all work to boost household incomes.
There has been a meaningful normalisation in Australia’s trading relationship with China over the past 12 months. The removal of tariffs on Australian wine exports to China in March was the latest in a string of decisions that represent a thawing in the relationship that soured in mid-2020.
Two scenarios in which former President Donald Trump returns to the White House in the 2024 election show global GDP taking a medium-term hit of 0.2%-1.3% after some short-term gains.
Following a long period of stagnation, machinery & equipment investment has experienced strong growth since the start of 2021 (Chart 1). At the end of 2023, real expenditure was around 30% higher than the average over the past decade and had surpassed the previous peak recorded during the mining investment boom in the early 2010’s.
Housing affordability is an active topic in the media and is increasingly part of political discord. Key metrics are running at or near record levels in many markets for renters and mortgage-holders alike.
