Furniture, appliances and TVs – all goods that typically are purchased to furnish a new home or update an old one. Furnishing and updating activity typically coincides or follows the property and property-construction cycles, both of which, which you might be aware, have been booming recently.
Take a look at the sales revenue from retail operations of Harvey Norman (HVN), a mature Australian home ‘furnishing’ retailer selling under the Harvey Norman, Domayne and Joyce Mayne brands. From a pre GFC peak of $1.78bn in 2007, sales fell to $1.3bn in 2013 along with property prices, before rising again to a new high of $1.83bn and coinciding with a booming property market.
Gerry Harvey and Ian Norman opened their first store in 1961, which specialised in electrical goods and appliances. Norman Ross became one of the largest appliance retail chains in Australia and by 1979 sales exceeded A$240 million. Grace Bros incorporated the chain into its business in 1982 and shortly after Grace Bros sold the chain to Alan Bond.
Norman Ross later went into liquidation in 1992.
In October 1982, after being sacked by Bond, Harvey and Norman purchased a new shopping centre in Sydney’s Auburn and opened the first Harvey Norman store. Harvey Norman Holdings Limited was listed on the Australian stock market on 3 September 1987.
An historical examination of Harvey Norman’s performance and dwelling commencements reveals an observable correlation. If, as we have previously articulated, building commencements and building construction are at a peak and if that peak is followed by a sharp slump in construction activity and associated employment, then there is a strong argument to suggest the strong share price run from $1.76 in December 2012 to $4.73 is over and a reversal is more likely.
As the illustration of the relationship between commencements and full time employment produced by our friend and equity researcher, Douglas Orr, reveals peaks in commencements have foreshadowed large drops in full time employment and Harvey Norman share prices in Q3-99, Q1-95, Q2-00, & Q2-08.
Full-time employment is collapsing in Australia and if our thesis on the ending of the residential construction boom is right, full-time employment will plunge further. Keep that thought in mind.
Turning now to the impact of the oversupply on landlords, an interesting data point is the impact on vacancies in Brisbane as a result of the apartment boom there. In the first nine months of 2016 approximately 5200 apartments were completed in within 5kms of the Brisbane CBD. Over the same period of time, vacancies in the 5km-15km band rose from 2.3% to 4.7% – more than doubling.
For a landlord with no tenant, the yield is zero. For a landlord with no tenant and no job, the only return is financial stress.
Oh and there are another 13,000 apartments being completed within 5kms of the Brisbane CBD in the next 18 months, so it’s unlikely the picture for landlords is going to get any better.
As the residential construction boom turns to bust – we note Development Approvals have dropped 23% in November 2016 – we expect jobs in the building sector to decline also. When employment slumps, retail or discretionary spending goes with it. And keep in mind we have record levels of mortgage debt in Australia.
High debt held by anyone with no tenant or no job, or both, will put pressure on currently booming sales and share prices for discretionary retailers.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
