Archive for year: 2025

By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 10 Dec 2025

Key points

• The RBA left its cash rate on hold at 3.6% as widely expected at is December meeting.
• Its commentary also became more hawkish (ie leaning towards a rate hike) on the back of the further rise in inflation in October. Governor Bullock reiterated that the Board will be data dependent and effectively warned it may have to raise rates if inflation does not fall back.
• We now expect the RBA to leave rates on hold next year with a fall back in inflation and still fragile consumer spending avoiding a rate hike but concerns about capacity constraints as the economy recovers likely preventing a rate cut and keeping the risk of a rate hike high.

RBA holds at 3.6% with a far more hawkish tone

2025 initially saw turmoil as US President Trump announced tariffs that were much higher than expected along with a bunch of other moves to upend US institutions and the global economic order. But the global economy held up okay. Key big picture themes for investors were:

The RBA’s decision to leave rates on hold at 3.6% was no surprise with it being the consensus amongst all 29 economists surveyed by Bloomberg and the money market factoring in zero chance of a change. The decision leaves the RBA having only reversed three of the 13 rate hikes seen in 2022 and 2023 (not that a cut back to a 0.1% cash rate was expected) and mortgage rates around levels prevailing 13 years ago.

Source: Bloomberg, AMP

The RBAs on hold decision follows the further increase in inflation seen in the new October monthly CPI which occurred in both headline and trimmed mean (or underlying) inflation and has taken Australian inflation back above many comparable countries. See the next chart.

Source: Bloomberg, AMP

Given the recent run of hotter inflation and demand data it was also not surprising to see the RBA further ramp up its hawkish commentary, but it’s now explicit after Governor Bullock’s press conference that the RBA now has a tightening bias. To be sure, the RBA expressed caution about reading too much into the new monthly CPI showing a further rise in inflation and reiterated that it expects some of the rise in underlying inflation to be temporary.

But its commentary was progressively more hawkish compared to last month with the post meeting Statement noting that the rise in inflation may be becoming more broad based, growth is picking up including for private demand, the housing market is continuing to pick up, the labour market remains a little tight, surveys show capacity utilisation above its long-run average, growth in unit labour costs remains high and if the pickup in the private sector continues it will add to capacity pressures. All up the RBA concludes that “the risks to inflation have tilted to the upside”, whereas the language previously noted “uncertainty…in both directions”. And at the same time the RBA notes that the impact from global uncertainties has been minimal.

Governor Bullock’s press conference comments came across as even more hawkish than the post meeting Statement. In particular she noted that the RBA did not consider a cut but did consider circumstances that may drive a hike, it did not see cuts in the “foreseeable future” so its about a hold or hikes and she reiterated a recent warning that “if inflation pressures look to be more persistent then it..might have to consider whether we need to raise rates.” And further that “if it looks like inflation is not coming back to the band then the Board will have to take action and it will.”

This effectively leaves the door wide open for higher interest rates next year if needed.

The RBA also indicated it will remain data dependent and, on this front, December quarter CPI data to be released in late January ahead of the RBA’s next meeting in February will be key as to whether we see a rate hike early next year.

We expect the RBA to leave rates on hold in 2026, but the risks are now a bit more on the upside

We are now forecasting rates on hold through next year, amidst conflicting economic indicators.

• On the one hand, the rising trend in unemployment, falling job openings, the tendency for economic data to run hot and cold, uncertainty around the new monthly CPI and business surveys suggesting its pick up could be partly temporary (with final product price rises in the NAB survey remaining benign – see the next chart) and the fragile consumer recovery (with, eg, the NAB business survey reporting easing consumer sector orders) suggest that it’s too early to be considering rate hikes. And it’s arguable that potential economic growth at present is really now above 2%yoy given productivity growth of 0.8%yoy and labour force growth of 1.9%yoy, rather than at 2%yoy which is around the economy’s current growth rate.

Source: Bloomberg, AMP

• But on the other hand, the strengthening trend in domestic demand growth and consumer spending, rising capacity utilisation in the NAB survey along with the renewed rise in inflation runs the risk that the economy is bumping into capacity constraints and possibly suggests that monetary policy is no longer restrictive. This would suggest that the risks are skewed to a rate hike next year.

So, on balance we expect to see the cash rate remain at 3.6% in 2026, with the swing back to rate hikes more a story for 2027. But we concede that the risks look like they are now a bit more to the upside on rates in 2026. However, our assessment is that the swing in the money market from expecting 2 or 3 more cuts after the August RBA meeting to now expecting nearly two hikes next year is premature and a bit too extreme.

Source: Bloomberg, AMP

That said as noted above the key to what happens early next year will be the December quarter CPI to be released in late January, with the November CPI on 7th January providing some early indication. Our assessment is that underlying inflation will drop back a notch to 0.8%qoq or slightly less from 1%qoq in the September quarter – partly supported by the weaker trend in final product prices from business surveys – allowing the RBA to remain on hold at its February meeting. Of course, if trimmed mean inflation in the December quarter does not fall back as we expect (and comes in around 0.9%qoq or more) than a hike as early as February is possible. Note that the RBA’s implied forecast in its November Statement on Monetary Policy is 0.8%qoq.

The bottom line

While the RBA is rightly more hawkish in order to send a signal that it’s committed to getting inflation back to target and therefore to help keep inflation expectations “well anchored”, our base case is that rates will be left on hold next year at 3.6% as inflation falls back, albeit the risks are now skewing a bit to the upside. December quarter CPI inflation is the key to what happens early next year on rates.

It’s also worth noting that while rates bottoming at 3.6% is not good news for those with a mortgage it may not be such a bad thing to the extent that it reflects a more positive economic outlook as this will underpin a return to profit growth in Australia after three years of falling profits. Of course, it won’t be so good if inflation stays above 3%yoy.

And for those wondering – Governor Bullock noted that the RBA will look through the impact of the ending of the electricity rebates on inflation next year, just as they looked through their impact when they were applied.

By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 25 Nov 2025

Key points

• With the latest surge in home prices relative to incomes housing affordability is at a new record low. This is adding to a slide in home ownership and rising inequality.
• The key to sustainably improving housing affordability is to better align immigration to housing supply, boost housing supply, encourage decentralisation and some tax reform.
• There are no quick fixes, and we have a long way to go.

Introduction

For as long as I have been an economist, housing affordability has been an issue. But while it was once mainly a cyclical concern associated with bouts of high interest rates, from the 2000s it’s become a chronic problem. With national home prices at new record highs housing affordability has reached a new record low. This is a terrible situation for a country with so much land and a small population that used to pride itself on the “Aussie dream”. This note looks at what can be done to fix the problem and why at the same time we need to make sure – in the face of calls to slash immigration and densify our cities – we don’t throw the baby out with the bathwater and create bigger problems.

Housing affordability keeps getting worse

But first a quick recap – how did we get here? After strong gains in home prices over many years, Australian housing is expensive relative to income, rents & its long-term trend and by global standards. Poor affordability is apparent in a surge in the ratio of average dwelling prices to average wages(red line in the next chart) & household income (green line) – both of which have more than doubled since 2000 and with the recent rebound in prices are now at record highs.

Note home ownership data is only available from 5 yearly census. Source ABS, Cotality, AMP

The time taken to save a deposit has also doubled over the last 30 years and is now at a record 11 years. Sure, a first home buyer can now get in with a 5% deposit, but this is with 95% debt! And the deterioration in affordability has contributed to a falling trend in home ownership, along with a range of other factors(see the blue line in the previous chart).

Source: ABS, Cotality, AMP

Key drivers of poor housing affordability

The drivers of poor housing affordability are hotly debated. Many zoom in on things like tax concessions for investors, SMSF buying and foreign demand. But investor and foreign demand were not big drivers of the 20- 30% surge in prices over 2020-22. And property tax concessions are common in other countries, without such poor affordability. Rather the key drivers have been a combination of three things:

• The downtrend from high interest rates at the start of the 1990s to low rates before and in the pandemic along with the increased availability of debt boosted borrowing ability and hence buyers’ capacity to pay for homes. But this is not the full story as lots of comparable countries have had low interest rates without such expensive housing. And interest rates are well up from their pandemic lows and yet affordability is even worse.
• Housing supply (for reasons ranging from too much red tape to capacity constraints) has failed to keep up with a surge in demand for housing that started in the mid-2000s with rapid population growth.
• The concentration of people in just a few coastal cities hasn’t helped.

Of these, the fundamental demand/supply mismatch is the critical factor behind poor affordability. This can be demonstrated in the next chart.

Source: ABS, AMP

Starting in the mid-2000s annual population growth jumped by around 150,000 people largely due to a surge in net immigration – see the blue line in the prior chart. This should have been matched by an increase in dwelling completions of around 60,000 homes per annum but there was no such rise until the unit building boom of 2015-20 leading to a chronic undersupply of homes – see the red line. The unit building boom and the slump in population growth through the pandemic helped relieve the imbalance but the unit building boom was brief and a decline in household size from 2021 resulted in demand for an extra 120,000 dwellings on the RBA’s estimates. The rebound in population growth post the pandemic then took property market back into undersupply again.

The next chart translates this into an estimate of the cumulative undersupply of dwellings in Australia. Up until 2005 the housing market was in rough balance. It then went into a massive shortfall of about 250,000 dwellings by 2014 as underlying demand surged with booming immigration. This shortfall was then cut into by the 2015-20 unit building boom and the pandemic induced hit to immigration. But it’s since rebounded again to around 220,000 dwellings, or possibly as high as 300,000 if the pandemic induced fall in household size is allowed for. The shortfall is confirmed by low rental vacancy rates.

Source: ABS, AMP

Four key things to improve housing affordability

Very high house prices and associated debt levels relative to wages pose two key problems. First, they pose the risk of financial instability should something make it harder to service loans. Second, the deterioration in affordability is resulting in rising wealth inequality, a deterioration in intergenerational equity, confining more to renting which will exacerbate wealth inequality (renters tend to be less wealthy over their lifetime than homeowners) and it is likely contributing to rising homelessness.

Some might see a house price crash as the solution. Yes, this would improve affordability – but it would likely also come with a deep recession and high unemployment which will make it hard for many to buy a house.

Other policies that won’t work, include: grants & concessions for first home buyers (as they just add to higher prices); abolishing negative gearing (which would just inject another distortion into the tax system and would adversely affect supply), although there is a case to cap excessive use of negative gearing tax benefits; banning foreign purchases altogether (as they are a small part of total demand and may make it even harder to get new unit construction off the ground); and a large scale return to public housing (as a major constraint to more units is excessive costs and delays, and just switching to public housing won’t fix this).

There are no quick fixes, but here are the four key things that need to be done to fix affordability:

• First, match the level of immigration to the ability of the property market to supply housing and reduce the accumulated housing shortfall of around 200,000-300,000 dwellings. – we have clearly failed to do this since the mid-2000s and particularly following the reopening from the pandemic, and this is evident in the ongoing supply shortfalls. Our rough estimate is that immigration needs to be cut back to around 200,000 a year (see here where we looked at the issue in detail) from 316,000 over the year to the March quarter.
• Second, build more homes – the commitment by Australian governments to build 1.2 million homes over five years was a welcome move down the path to boost supply. One year into it though and we have only completed 174,000 homes and approvals are only running around 190,000 homes annually, so we are well below the implied 240,000 annual target. To meet the target will require relaxing land use rules, less red and green tape, shifting to faster ways to build including with modular and pre-fab homes, encouraging build to rent affordable housing, training and importing far more tradies and refocussing more on units. In terms of the latter the only time we consistently built more than 200,000 homes per annum was in the unit building boom of the 2015-19 period.
• Third, decentralisation to regional Australia – this needs appropriate infrastructure and measures to boost regional housing supply.
• Fourth, some tax reform – including replacing stamp duty with land tax (to make it easier for empty nesters to downsize) and reducing the capital gains tax discount (to remove a pro-speculation distortion).

But don’t throw the baby out with the bathwater

But in seeking to address the problem we need to act in a balanced way. In particular, immigration has been a huge benefit to Australia by boosting labour supply and addressing labour shortages, supporting state and federal budgets, slowing the aging of the population, boosting innovation and enhancing cultural diversity and vibrancy. In particular, via international students who count as immigrants, it helps drive more than $50bn in education export earnings each year, which is our fourth biggest export earner behind iron ore, coal and gas. Ideally, universities should be able to have as many foreign students as they like providing they house them on campus as this would take pressure off existing housing.

Secondly, observing that Australian cities are very low density compared to cities in Europe, Asia and parts of the US (see the next chart) has led some to suggest that the solution to poor affordability lies in densifying our cities. For example, a plan from the Grattan Institute proposed allowing three story units to be built anywhere in Australia’s capital cities. This extreme form of YIMBYism would be a monumental mistake – not only would it push city land values further into the stratosphere exacerbating inequality but it will put the nail in the coffin of the quarter acre block at the centre of the “Aussie dream” epitomised in films like “They’re a Weird Mob” and “The Castle” and the TV show “Neighbours”, which is one of the things that has made Australia great and why people want to come here. Going down the path of even bigger, congested cities seen internationally is not a solution. Which is why allowing more units in Australian cities should be seen as a short-term measure with decentralisation to regional centres being the long-term solution.

Source: Grattan Institute

By Dr Shane Oliver – Head of Investment Strategy and Economics and Chief Economist, AMP Capital | 8 Oct 2025

Key points

• Rich share market valuations are warning of the risk of a pullback in shares amidst fears of a bubble and it’s possible that enthusiasm for AI has run ahead of itself. But the fundamentals behind this are arguably far stronger than they were at the time of the late 1990s tech boom.
• For investors and super fund members, the danger in trying to time corrections and bear markets is that you miss out on longer-term gains. The key is to adopt an appropriate long-term investment strategy and stick to it.

Introduction

Lately, some commentators and investment experts have been expressing concern about a bubble in equity markets with some referring to excessive optimism about AI and drawing comparisons to the late 1990s tech boom. Some have been advocating holding a higher proportion of funds in cash in response. This note looks at the key issues and what it means for investors. As the concerns centre on the direction-setting US share market, we will focus mainly on that, as any fall there will impact Australian shares.

Why the bubble worries?

The concerns about a bubble reflect a combination of factors:

• First, shares have been enjoying very strong gains led by the US with most at or around record levels. The US share market is up 35% from its April US tariffs driven low & has returned 25%pa over the last 3 years with global shares returning 23%pa and Australian shares 15%.
• Second, valuations are stretched with the forward price to earnings ratio on US shares at 23.6 times, not far below the 1999-2000 tech boom high of 26 times. The PE on Australian shares is well above its tech boom high. Note PEs were above current levels in late 2020/early 2021 due to distortions caused by the pandemic.

Source: Bloomberg, AMP

Related to this, the risk premium offered by shares over bonds – the gap between the forward earnings yield (inverse of the forward PE) and the 10-year bond yield – is very low in the US and Australia.

• Third, the US share market has been disproportionately driven by a group of tech stocks. For example, the Magnificent Seven stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla) have been accounting for 50% or more of the gains in the S&P 500 since 2023 despite being about one third of market capitalisation. This arguably leaves US shares very vulnerable to the performance of this narrow group of tech/AI focussed companies.
• Fourth, this narrow group of stocks have surged in value over the last decade initially reflecting FAANG (Facebook, Apple, Amazon, Netflix & Google) enthusiasm that has morphed into AI enthusiasm since Chat GPT was released in 2022. As can be seen in the next chart the Magnificent Seven group of stocks have risen more than 30-fold since 2015 dwarfing various other “bubbles” over the last decade including the tenfold rise in the tech heavy Nasdaq into 2000.

Source: Bloomberg, AMP

• Fifth, while there is a high level of corporate interest and investment in AI, evidence that they are reaping a benefit is mixed with many projects at the pilot stage with issues around data, culture, leadership and skills. In other words, AI hype may have run ahead of the reality.
• Sixth, speculative assets like gold and bitcoin have also been strong, suggesting speculative attitudes may be starting to take hold.
• Finally, share markets appear to be disconnecting from a long worry list that includes: uncertainty around US tariffs and their impact; the slowing US jobs market; messy US economic policies and the latest shutdown; uncertainty as to whether the Fed will cut rates as much as the 4-5 cuts the US market is expecting; concern about public debt sustainability in the US, France, UK and Japan; & elevated geopolitical risks particularly with escalating tensions between Russia and NATO and the risk of secondary tariffs on countries importing Russian oil.

But could this time be different?

Over the years I have seen numerous bubble calls only for the market to keep going up or see nothing more than a brief correction. There are several arguments against the bubble call making it all a shade of grey:

• First, while the risk premium offered by shares is low, bond yields today are much lower than when the tech boom peaked in early 2000 when they were over 6%, so the equity risk premium is at least better than it was back then particularly in the US.

Source: Bloomberg, AMP

• Second, while the chart above showing a comparison of “bubbles” highlights the extreme gains in the Magnificent Seven it probably exaggerates the case for a bubble. It shows gains much bigger than the tech heavy Nasdaq going into 2000, but this time around Nasdaq has not gone up anywhere near as quickly. There is a danger in focussing on a select group of stocks – just as there was last decade when the FAANG stocks were said to be in a bubble. Perhaps the comparison should be the “dot com” stocks of the late 1990s.
• But here there is a notable difference. Dot com stocks were making little in the way of profits, but Magnificent Seven stocks are making huge profits as a group with very strong profit growth, running around 30%yoy. Profit growth for US tech companies generally is around 17%yoy. More broadly US company profit growth has continued to surprise on the upside and is likely to have been around 11.5%yoy in the September quarter.
• Fourth, while initial results on the benefits of corporate investment in AI are mixed, it was inevitable that this will take time, but anyone who has used AI tools can see the huge benefit they offer in doing things faster (like doing the research for these notes!) and boosting productivity. Related to this AI systems, or specifically large language models, are very data and computationally intensive and will require a significant build out of data centres which in turn will mean high levels of business investment and demand for raw materials like copper.
• Fifth, while global business conditions PMIs – i.e. surveys of how businesses are faring – have slowed they are still at levels consistent with reasonable economic growth. In other words, there is no sign of recession which is important because major bear markets in shares tend to be associated with recession – although this is no guarantee as share markets often lead the way.

Source: Bloomberg, AMP

• Sixth, measures of US investor sentiment show optimism, but they are arguably not yet indicative of euphoria towards shares that may be associated with a major share market top. See the next chart.

The Investor Sentiment index is based on a composite of surveys of investors and investment advisers and options positioning. Source: Bloomberg, AMP

Related to this, bubbles don’t normally see lots of people doing bubble searches online so the surge in Google searches for an “AI bubble” since June may be a positive sign from a contrarian perspective, i.e. that we are not in a bubble yet.

Source: Source: Google, AMP

• Finally, while there is no doubt a speculative element in investor demand for gold and bitcoin pushing their prices up, their surge partly owes to demand for a hedge against feared unsustainable public debt levels, worries that this might be monetised (i.e. where governments allow higher inflation to reduce the real value of debt) and geopolitical threats. So, record high levels of both are not necessarily a sign of a broader speculative mania.

Implications for investors

What are investors to make of all of this? There are four key points.

• Rough periods – corrections and sharp bear markets – are normal in share markets and are the price we pay for the higher returns compared to defensive assets they provide over the long term.
• Rich share market valuations are warning of the risk of a pull back in shares and it’s possible that enthusiasm for AI has run ahead of itself. But the fundamentals behind this are arguably far stronger than they were at the time of the late 1990s tech boom.
• Either way it’s very hard to time share market moves. There were warnings of “irrational exuberance” in US shares in 1995, and it went on for another five years. The danger in trying to time corrections and bear markets is that you miss out on the longer-term gains.
• The key is to adopt a long-term investment strategy appropriate for your risk tolerance, financial situation and age and stick to it.