Australia’s housing market has been more resilient than expected, helping the economic recovery and the performance of banks and developers, which is likely to continue as money pours into the property sector.

According to the Reserve Bank of Australia, there have been few signs of a deterioration in lending standards with housing price rises reported across most of Australia. This has returned the national housing price index to levels reached around four years earlier, with record low interest rates pushing people into the property market.

Reflecting that, the total value of new loan commitments for housing reached a record high in December 2020, rising 8.6 per cent to $26 billion, a 31.2 per cent increase on December 2019. The value of new owner-occupier home loan commitments rose 8.7 per cent to a high of $19.9 billion, 38.9 per cent higher than December 2019, the Australian Bureau of Statistics reported.

Also reflecting the strong demand for housing, the number of private sector dwellings approved jumped 55 per cent in December 2020 from December 2019, while total dwellings rose 22.8 per cent, according to the ABS.

With such a huge amount of money flowing into the housing market, banks and property developers are benefiting.  Mirvac Group (ASX: MGR) recently revealed an operating profit of $276 million for the first-half to 31 December 2020, an increase of 10 per cent from the second half of 2020.  Morningstar analyst Alexander Prineas maintains his forecast of 2,260 residential settlements over the full fiscal year for Mirvac after its results.

“In fact, we're more confident in that number now that Mirvac said it anticipates ‘more than 2,200 settlements,’ having previously refrained from providing an estimate. The half-year results suggest the group is tracking toward our expectation, with 1,076 settlements booked in the first half, and another 400 between January 1 and the release of results on February 12 taking the known settlements to 1,476,” said Prineas.

“House price appreciation and interest rate cuts since Mirvac commenced its current crop of projects provides a buffer against house price risks, though further corrections and extended border closures are a risk,” Prineas said, putting a fair value on the stock of $2.65 compared to its current price around $2.20.

Property prices to keep rising

According to chief economist with AMP Capital, Dr Shane Oliver, record low interest rates, multiple government home buyer and income support measures, pent-up demand from the lockdowns, and buyers’ fear of missing out have combined to reduce the negative impact of higher unemployment, a collapse in immigration and weak rental markets.

“Australian home prices are likely to continue rising over the next two years thanks to record low mortgage rates and the recovery in the economy, with the latter offsetting the phasing down of income support measures and bank payment holidays. Housing finance is running around record levels and auction clearance rates are at levels consistent with strong price gains,” Oliver said.

“As a result, average capital city home prices are expected to rise by 5 to 10 per cent this year and next. While first-home buyer incentives are likely to be reduced, investor interest is expected to pick up and fill the gap,” he says.

“However, the outlook is divergent—with houses expected to outperform units and smaller cities and regional property expected to play catch-up.”

Debt rising, but households are managing

The surge in prices relative to incomes has seen the ratio of household debt to income rise five-fold over the past 30 years, taking it from the low end of OECD countries to the high end, Oliver said.

Australian housing is expensive relative to income and rents

a chart showing Australian housing is expensive relative to income and rents

Source: OECD, AMP Capital

However, households are coping well.  An ABS survey in December 2020 reveals that just 1 per cent of homeowners with a mortgage were in arrears, though another 7 per cent had mortgage payments for their dwelling deferred since March 2020 while 6 per cent had mortgage repayments for their dwelling reduced (excluding interest rate reductions).

Banking on an upturn

The stronger-than-expected property and economic rebound has also boosted financial results for the big banks. Commonwealth Bank's (ASX: CBA) first-half fiscal 2021 cash profit of $3.9 billion was stronger than Morningstar banking analyst Nathan Zaia had expected, predominantly due to lower home loan loss provisions.

While profit fell 11 per cent from first-half fiscal 2020, Zaia’s fair value estimate has increased 8 per cent to $77 per share. “Some market investors consider CBA's strong emphasis on home loans a weakness, but we argue it is a key strength. In our view, concerns centred on a US-style housing crash in Australia are overdone,” Zaia said.

Investment bank UBS too has lifted its CBA price target to $90 a share from $80 and upgraded its earnings per share (EPS) forecasts for the 2020-21 financial year by 2 per cent, reflecting stronger credit growth given the robust housing market and significantly lower bad debts than expected.

National Australia Bank (ASX: NAB) also reported healthy results. NAB’s net profit after tax for the first quarter of $1.65 billion was ahead of market expectations given low credit impairment charges.  “We expected a strong rebound in profit, but wide-moat-rated National Australia Bank's first-quarter cash profit of $1.65 billion exceeded our expectations. Loan impairment expenses of $15 million are extremely low, down 98 per cent on the quarterly average over fiscal 2020,” Zaia said. He has lifted his fair value estimate by 4 per cent to $26 per share.

According to UBS, NAB has recorded its lowest credit impairment charge since it began reporting quarterly earnings in 2008. The investment bank expects dividends to increase too over the full year.

“With a strong capital position and strengthening economy, we expect NAB to announce higher dividends and we have factored in a $3 billion buy-back with its financial year 2021 result (subject to APRA approval),” UBS said.

Zaia has also raised his fair value estimate for Westpac by 8 per cent to $27 on lower medium-term loan impairment expectations. The bank’s $2.2 billion cash profit for the December quarter was 54 per cent higher than the average profit over the last two quarters and the bank reported a significant increase in home loan applications.

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