It has been a relatively quiet month for meaningful news on the economy other than for confirmation of further falls in house prices.
The overarching picture for the economy continues to point to slowing economic growth, a steady rise in the unemployment rate, inflation remaining too high and steady official interest rates.
The fall in house prices is moving to be a key economic issue for the remainder of 2026 and into 2027. This is because houses are the dominant component of household wealth – housing is worth $12.4 trillion versus $4.5 trillion in all superannuation assets. A significant fall in house prices would have severe implications for household spending and, if sustained, would act to undermine new dwelling construction.
At this stage, house prices are poised for a fourth consecutive month of decline in July, with the largest falls to date in Sydney and Melbourne. Having boomed in the last two years, house prices are now falling in Adelaide, Brisbane and Canberra while the pace of increase has slowed appreciably in other cities.
In terms of key data, the labour market is stable albeit with a small uptick in unemployment, while new dwelling building approvals, government spending and exports are all slowing. Growth in household spending is broadly flat. There is a bright spot for the economy in the form of business investment which is expanding at its fastest pace in more than a decade.
Two key issues for the economy will be the June quarter inflation data which is due for release on 29 July and the RBA meeting on 10 and 11 August. No change in official interest rates is expected at this time.
The global economy continues to be buffeted by geopolitics, especially the oil price which is gyrating on each bit of news that points to a resolution, or otherwise, of the conflict in the Middle East. That said, many central banks have started or continued an interest rate hiking cycle while most others are poised to lift interest rates in response to higher inflation.
Key data
- Household spending jumped 1.3 per cent in May after falling 1.1 per cent in April and rising a strong 1.6 per cent in March. This extreme volatility is linked to swings in petrol purchases which in turn in linked to price issues and fears of shortages. Excluding petrol, household spending is still rising although the rate of increase is moderating.
- Since 2023, the unemployment has been trending higher and in June it was steady at 4.4 per cent. This is 1 percentage point higher than the cyclical low of 3.4 per cent in 2022. In something of a surprise, employment rose 76,000 in June, but the ABS noted a sampling change may have boosted the recorded level of employment. Of note, the underemployment rate rose while aggregate hours worked were subdued.
- After a decade long slump, there has been a strong recovery in private sector business investment. While the bulk of the increase has been driven by investment in data centres, there has also been a lift in investment in accommodation at education facilities, warehouses and hotels.
- After a sharp fall in March, business confidence has recovered but it remains relatively subdued. The oil shock, interest rate hikes and some policy uncertainty are all impacting. Business conditions, which are a better gauge for the actual health of the economy, remained flat in May but are mildly positive.
- The weekly Roy Morgan – ANZ index of consumer confidence fell to a 53 year low in April/May. It was petrol prices, interest rates and cost of living concerns that impacted consumers. From that low point, consumer sentiment has risen 20 per cent in the past two months, but it remains deeply negative.
- After strong growth through to early 2026, the number of new dwelling building approvals is topping out. Dwelling approvals fell 1.1 per cent in May following a fall of 0.2 per cent in April. Previously approvals had risen 30 per cent from the low point in late 2024. As house prices fall (see below), the incentive for developers to undertake projects is severely curtailed for fear of being left with properties that will sell for less than the cost of construction.
RBA monetary policy and the current market pricing for the cash rate
The broad trend in recent months has been to lower the probability of future rate hikes. This has reached the point where there is a broadly even chance of a final 25 basis point hike by end 2026. Some market participants are openly forecasting interest rate cuts in 2027 on the assumption that inflation decelerates on the back of the weaker economy and unemployment rises towards 5 per cent.
The bias globally has been towards rate hikes. The European Central Bank, Bank of New Zealand and Bank of Japan have all increased interest rates in recent months and hikes are broadly expected in the US, UK and Canada before year-end.
House prices
House prices peaked in March 2026. Since that top, Australia -wide house prices are down by 1.5 per cent, with larger falls of around 4 per cent in Sydney and Melbourne.
There has been a lift in dwelling supply associated with a rise in new listings for sale, demand has edged marginally lower on the back of slower population growth and there has been a squeeze on credit from the banks tightening lending. The pessimistic consumer is also impacting housing demand.
Investor demand has dried up in the wake of tax changes in the Federal budget and, at this stage, first home buyer demand has not been strong enough to offset this negativity. While house prices are not targeted by the RBA, it is aware of the effect on wealth of house price changes. In this instance, if the fall in house prices hits 5 per cent and prices move lower still, it will be concerned that household spending will be negatively impacted as well as the growing risks to bank balance sheets.
The supply of new dwellings has, for the near term, some upside momentum. Not only is investment in new dwellings increasing, but the work in the pipeline and yet to be done point to solid activity into 2027.
Stephen Koukoulas is Managing Director of Market Economics, having had 30 years as an economist in government, banking, financial markets and policy formulation. Stephen was Senior Economic Advisor to Prime Minister, Julia Gillard, worked in the Commonwealth Treasury and was the global head of economic research and strategy for TD Securities in London.
