While there’s abundant negativity on the Australian housing market, activity levels look OK. Building approvals are at 205,000 vs peak 250,000 vs the long-term average 160,000 and importantly, unemployment is exceptionally low.
Here are the variables:
1. Banking Royal Commission – slowdown in lending.
2. Labor policy on capital gains and negative gearing.
3. Wet weather impact on housing-related stocks.
The key question for share price performance in this space is whether earnings revisions are likely to be positive or negative over the next 12 to 18 months.
A cyclical sector – what indicators to watch
This sector is cyclical and is impacted by a number of factors. Some key economic factors to be watching include:
- Employment: if employment remains strong, that should see a relatively soft landing for property and lessen the impact for consumer-related stocks from the wealth effect.
- Money supply: Money supply growth is at a 26-year low. The money supply hit a high in November 2017. The money supply is the amount of money in the system. Money supply and total lending have a positive impact on property prices.
- Building approvals is important as a forward indicator for building activity and demand, which in turn impacts on building material and construction companies.
Which stocks are impacted?
1. Stockland Group (SGP) is most exposed to slowing housing conditions, due to low level of presales. If lending does not become easier to obtain, this is a significant risk for the business.
Mirvac (MGR) expects a record level of settlements in FY20. Australian apartment revenue forecasts are covered by presales. While the company has a high weighting to the office market, sentiment towards the company is unlikely to turn positive until residential property conditions look to improve.
2. Lendlease (LLC) is a little bit different in that it is more an offshore growth story and earnings from overseas means that by next financial year, Australian residential contribution will be ~13% of the group’s earnings. A positive catalyst would be the sale of the engineering division which has been behind recent profit downgrades.
Here are the smaller companies: Cedar Woods Properties (CWP), Tamawood Ltd (TWD) and Villaworld (VLW).
What about related stocks/industries?
The rise in household debt to income and negative housing price moves means a difficult environment generally for consumer-related stocks, as well as the landlords. In particular, companies that are exposed to housing through the sale of furniture and whitegoods are impacted. Over the last three months, some of the worst retail performances have been from stocks such as Super Retail Group (SUL), Domino’s Pizza (DMP), Automotive Holdings Group (AHG), Premier Investments Ltd (PMV), which may all be suffering from a more cautious consumer.
And here’s an opportunity
WES: Bunnings = ~50% EBIT, watching sales LFL numbers in February. The fall in real estate prices should encourage owners to upgrade existing properties rather than sell and upgrade.
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