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Housing uptick may lift banks, property portals

Nicki Bourlioufas  |  23 Sep 2019Text size  Decrease  Increase  |  
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The Australian property market has rebounded, and some experts are predicting investors could pile back into property, helped by lower interest rates, which could help lift the big banks' earnings and those of online property portals. 

Shane Oliver, head of investment strategy and chief economist at AMP Capital, says house prices are heading up again, boosted by lower interest rates and greater certainty after the federal election. While Oliver had expected prices to continue to fall this year, the May election removed the threat to negative gearing and the capital gains tax discount.

Along with lower interest rates and a relaxation of lending rules, these factors are all working to push up house prices again.

The RBA is tipped to reduce the cash rate by 25 basis points when it meets next month. NAB analysts on Friday revised their initial forecasts of cuts in November and February to October and December, predicting the cash rate - currently at a record low of 1.0 per cent - would be slashed further to 0.5 per cent by the end of the year.

“While it varies from city to city, despite much scepticism recent rate cuts have helped push up the property market again,” says Oliver. “If auction clearances remain elevated as listings pick up, then it will be a positive sign that the pick-up in the property market has legs.”

Banking analyst with Morningstar, Nathan Zaia, says any rebound in house prices should be a positive for the big banks, especially the Commonwealth Bank (ASX: CBA) and Westpac (ASX: WBC), which have a much larger weighting of their loan book to residential mortgages and consumers than the National Australia Bank (ASX: NAB) or ANZ (ASX: ANZ).

“Rising house prices are a positive for a couple of reasons. Obviously, homebuyer confidence is crucial to demand for credit, but higher prices also means the average size of new loans is larger, and existing homeowners have more equity, which potentially means increased borrowing capacity,” says Zaia.

Another benefit of rising house prices is that bad debts will remain contained, says Zaia.

“Assuming unemployment remains low, it should also be a good thing for 90-day delinquencies and bad debts. As we have seen in recent results, as house prices fell, people in mortgage stress were taking longer to sell their property – either not willing to take the lower price, or unable to find a borrower as banks worked through changes to lending practices, pushing out approval times and lowering approval rates.

“In a stronger housing market, homeowners who unfortunately find themselves unable to meet repayments, be it lost job, divorce, or illness, can sell their property without defaulting on their loan,” says Zaia.

He puts a fair value of $80 on the Commonwealth Bank, which at 1.30pm on Monday was trading just above that at around $82. Westpac is just below its $31 fair value at $29.74, as is ANZ at $27.93, slightly under Morningstar’s fair value of $29. NAB at $29.63 is around fair value.

Household debt remains a worry

However, the boost to the big banks’ earnings by any housing rebound will be limited by the sheer scale of household debt, which is chewing up a big chunk of Australians’ income.

“We do not expect house price increases to drive a material increase in credit growth though, simply because we think serviceability (ability to make repayments) remains tight. With wage inflation stubbornly low and the long period of credit fuelled growth in home prices, household debt/income is at near record highs,” says Zaia.

Patrick Potts, portfolio manager with Martin Currie, a Legg Mason affiliate, says other beneficiaries of an improvement in the housing market are the online property portals, Domain Group and REA Group.

“Our confidence around this is that we have seen some recovery in auction clearance rates from a low of around 45 per cent in mid-2018 to be around 70 to 75 per cent currently. This is still well below the elevated levels we saw in 2017. Nonetheless, clearance rates are an important indicator as we head into the peak spring selling season,” says Potts.

“Historically we see that a pick-up in auction clearance rates precedes a pick-up in action activity and house price.”

At their recent annual result presentations REA Group (ASX: REA) and Domain (ASX: DHG) both pointed to improved website and app activity, and enquiry levels from buyers are starting to pick up.

“While the data looks promising feedback from the coal face is mixed, however. Some real estate agents are seeing a pick-up in vendor activity and more enquires for properties on market, others haven’t. However, it is clear that the Australian property market is recovering from a nasty downturn and the online property portals are likely to benefit from this recovery,” says Potts.

Doubts over building suppliers

Morningstar building analyst Johannes Faul doubts building materials will benefit as quickly as the big banks or online property portals if house prices continue to improve.

“Demand for building materials is largely driven by residential construction activity, rather than house prices. While house prices look to be beginning to turn a corner, housing construction is unlikely to stage a meaningful rebound near-term,” says Faul.

“Residential construction activity is cyclical, with the most recent cycle peaking in fiscal 2018 at 231,000 starts. Activity has declined in the time since, and a bottoming of housing approvals is yet to arrive.

"While we do not expect a meaningful rebound near-term, recent movements in long-term Australian interest rates and housing prices are supportive and may indicate that a bottom in housing approvals is approaching.”

Despite improved confidence in the property market, capital city residential prices fell 0.7 per cent over the June quarter, according to figures released by the ABS. But that was less than the 3 per cent drop in the March quarter.

Sydney prices fell -0.5 per cent, a considerable bounce back from its 3.9 per cent fall over the March quarter. Property researcher CoreLogic has since noted an increase in prices in July and August.

 

is a Morningstar contributor.

Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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