The chief executive of the largest listed developer in Australia, Stockland's Mark Steinert, said he had no doubt a shortage in housing was on the way by next year.

“Based on the decline in construction approvals over the past two years we are forecasting an underbuild of new dwellings in 2020, particularly in Sydney, which will lead to more affordability challenges for Australians," Mr Steinert said.

While the data series is volatile and is markedly lower year-on-year, the surprisingly strong reading in September is the latest above-forecast data point to challenge the downbeat consensus.

Better jobs picture

In mid-October, the market welcomed improved employment figures - including reduced unemployment and underemployment rates - which signalled the Reserve Bank's rate cuts are starting to flow through to the wider economy.

Given the developments in the past couple of months, interest rate futures pricing for another Reserve Bank rate cut this year has "almost been completely wiped out," Westpac's Mr Callow said.

In the US, the Federal Reserve lowered the Fed funds rate on Wednesday by 25 basis points to a range of 1.5 per cent to 1.75 per cent, as widely expected, and signalled that the hurdle to another rate cut was now higher.

The US dollar weakened after the Fed decision, buoying other G10 currencies including the euro and sterling, but the Australian dollar was the standout performer of the session.


"The Federal Reserve cutting supports the Australian dollar," said Ben Udy at Capital Economics. "Australian interest rates are much lower than US rates, but when the Federal Reserve cuts, that narrows the relative difference."

Due to the relationship between interest rates and currency markets, the Reserve Bank of Australia "is a bit tied to the Fed" when it comes to the level of domestic interest rates, according to Mr Udy.

"They only have so much control over domestic rates and are somewhat forced to go where global rates are going. The Federal Reserve is the biggest part of that global rates story."

Reserve Bank governor Philip Lowe has been at pains to explain the importance of lowering interest rates to depreciate the currency and stimulate the economy.

"We can't ignore ... the responses of other central banks. If we did seek to ignore these trends, the exchange rate would most likely appreciate," Dr Lowe said on Tuesday.

"In the current environment, this would be unhelpful for both jobs growth and for achieving the inflation target."

Global economy

For Rodrigo Catril, currency strategist at National Australia Bank, the current level of the Australian dollar is not likely to unduly trouble the Reserve Bank: "The Australian dollar at US69¢ is not a major concern," Mr Catril said.


However, if the currency is comfortably over US70¢ by December, "then maybe the strength of the currency becomes a concern."

Stephen Kirchner, program director for trade and investment at the United States Studies Centre, University of Sydney, said that the RBA's efforts to prevent the Australian dollar appreciating would not be damaged by the Fed's moves.

"The Fed cuts have less of an effect on the US economy via the exchange rate than the RBA rate cuts have on ours because our traded goods sector is relatively larger," Dr Kirchner said.

"When we are cutting at the same time as the Fed we get more of a benefit through the exchange rate than the US.

"The US dollar also tends to be a lot more resilient in global downturns due to safe haven flows, so the exchange rate is still a powerful channel for Australian monetary policy even when the Fed cuts."

The economist speculated that the Fed's broader intention was still helpful for the Reserve Bank. "I think the main lens Lowe sees this through is that the US is offsetting a downturn in the US and world economy, so that supports what the RBA is trying to do here."

Pause

Fed chairman Jerome Powell indicated that the most powerful central bank in the world wasn't planning to follow up with another rate cut.


"We're not thinking about raising rates right now. What we're really thinking now is that our current stance is appropriate and will remain so.

"There's plenty of risk left, but the risks do seem to have subsided."

But the Fed decision came just hours after official preliminary figures showed US economic growth cooled to 1.9 per cent last quarter from 2.1 per cent.

"The Fed tried to give a positive spin on the US economy but the fact that US yields finished the day lower and the US dollar is lower is quite telling," Westpac's Mr Callow said.

"Markets don't believe that the Federal Reserve is finished," he said.

In Australia, financial markets have dramatically reduced the chances of further rate cuts over the next six months.

"The terminal rate is now comfortably above 0.5 per cent next year," Mr Callow said.

Housing story


Part of the change is the the improved language of the Reserve Bank and the impact of three 25-basis point interest rate cuts this year on the property market, where prices have risen 3.6 per cent in the last four months.

However the Reserve Bank has forecast that dwelling investment could slide another 7 per cent and that there was "some risk the decline could be even larger". It also expects that there could be a shortage in housing in the "foreseeable future".

Following the surprisingly high Thursday residential approvals, some business leaders cautiously pointed to the potential of a shorter downturn in the residential construction cycle.

Stockland's Mr Steinert also said: "It is critical that planning and approval processes are streamlined to support investment and the release of new land and infrastructure so that new housing can be delivered in liveable, connected communities.

“As we said at our recent market update, conditions remain somewhat variable although our confidence in the pace of recovery in the residential market has improved.”