Equities

The CBA has had the highest level of home loan applications in the last week it has had for the last six months. This is a Corelogic chart showing the 'election effect' on clearance rates.

This is Citi's forecast for house prices…they concur with a host of other commentators (ANZ, HSBC) that the housing market is bottoming – they are a bit more optimistic about when, which judging from the chart, is about now:

And Macquarie have put this chart out showing that the recent house price correction is up there with the biggest in the last thirty years.

And this chart of Australian house prices:

 

All the brokers are warming to the same theme. The Australian residential property market is at bottom.

As I wrote recently, the election result last week was very good news for the residential property market. For the last two years, since APRA introduced tighter lending regulations and the Banks were immobilised by the Royal Commission, the turnaround for a new housing loan blew out from two to three weeks to five to eight weeks. The mortgage industry became constipated and in some cases, paralysed. Combined with the threat to negative gearing house prices have had their biggest peak to trough fall since the 1990’s recession and until the election, the prediction was that the house price slide would run at least into next year.

Suddenly, all that has changed. For the reasons below which we published the day after the election, the odds are that the housing market bottomed on May 18, election day.

  • All the activity in the property market that was delayed because of the election/political uncertainty can now confidently go ahead. If the CBA is right, it has clearly already started. Property listings and clearance rates will now start to rise. Activity feeds activity and prices will follow.
  • Negative gearing will now be left alone. This was a serious hurdle for any property investors. Property investors can now get on with business as usual, knowing that the government are not going to bugger about with their core enticement, negative gearing, probably, ever.
  • The government’s first home buyers deposit scheme (first home buyers can buy a house with a 5% deposit instead of 20%) is of minor consequence, but it is a statement that the government are working to engineer a bottom in the property market. We now have both the government and the RBA working on basing the housing market. It doesn’t get any better than that.
  • With the election out of the way, the RBA is free to cut interest rates with a 92% chance they will do so next week for the first time in almost three years (the CBA concurs with that expectation) with another rate cut expected before the end of the year. When the RBA cuts it will prompt the whole “Property market bottoming” conversation again to the benefit of the affected housing market-related stock. Real estate agents and mortgage brokers rejoice. And it will trend…Brokers are expecting interest rates to be 1.0% by the end of the year with another cut in August with some brokers predicting another cut as well with rates down to 0.75% by the end of the year (I notice St George Bank with a forecast that the A$ is going to 66c by the end of the year).
  • We have already seen APRA lift lending restrictions in December last year, restrictions that were imposed in March 2017. APRA said in December that those measures were always intended to be temporary, more likely they were intended to be permanent but had become temporary because they caused an unintended drop in the property market that threatened to tip Australia into recession. Either way, even APRA, the regulator, is now on board trying to engineer a bottom in the property price slide.
  • Last week APRA also announced that they are removing the 7% serviceability requirement for mortgage lenders. That means APRA had told mortgage lenders that they must apply a safety margin to mortgage lending meaning a lender must be assessed on their ability to borrow money at 7.0% rather than the current mortgage rate. The banks added another ‘prudential’ 25bp margin to the 7% so before the relaxation mortgagees had to prove that they were capable of repaying their loans at a 7.25% interest rate. APRA has now told the banks that they now only need to assess a mortgagee’s ability to repay at 6.0%. This brings a whole cohort of new buyers into the market and combined with a fifty basis point interest rate cut, the back of the envelope suggestion is that homebuyer borrowing capacity will have increased by 14% by the end of the year with obvious implications for the housing market.
  • The Liberal win was a boost for consumer confidence as consumer anticipate tax cuts rather than tax persecution. Consumers are feeling a lot more comfortable since the election, as evidenced by a bounce in bricks and mortar retail stocks since the election. This is also positive for housing market confidence and activity.
  • Less need to downsize. Secure in the knowledge that the Liberal government will not mess with their franking credits, there is less pressure for retirees to sell their homes and downsize.

The obvious conclusion is that you should head out and buy a property. But for most of us, we already have enough property exposure through our tax-free principal residence, property is a ‘hold’, we don’t trade it. It is too cute, and it's too expensive and complicated to trade. Here is a table I did some years ago about the difference between property and stock market investment. You don’t have to fix the toilet and BHP, and you can sell BHP on a click – it's also what “I” and you, if you are reading Marcus Today, do. So let’s stick to stocks.

The pros and cons of property versus shares

So for those of us who prefer to be clicking buttons at home and are not interested in finding tenants and fixing toilets, there are plenty of housing market proxy stocks in the stock market, stocks that are just as, if not more sensitive to the property market than a unit in Ballarat and can be traded from our kitchens. Here is a list of some of most of them:

Housing market-related stocks

The main play for the retiree investor starts with the banks which now offer the double attraction of still offering retirees franking credit refunds. The bank sector accounts for 25% of the market, offers 8% to 10% yields, is in a sentiment hole and is highly dependent on a healthy housing market for loan growth; it is the key driver. If the housing market gets going, we will see the bottom of the earnings cycle for the banks this year. This is the obvious play for investors, and the message to fund managers is that it is now dangerous to be underweight this large sector.

But there are many other stocks as you can see above that offer exposure to the property market. They include real estate investment trusts, Stockland for instance, residential property developers, building materials businesses, Boral and CSR, not to mention REA Group, mortgage brokers and real estate agents. But the most significant of all will be the banks. They have had two years in the cold, with a host of reasons why they should now warm up.

And if the housing market lifts or bottoms, the car industry which has also had a torrid couple of years, whose fortunes are on the same cycle as the property market, will also recover. Here is a list of motor industry related stocks:

Motor industry related stocks

And after the motor industry, we then look at retailers, but I wouldn’t get too excited about consumer discretionary stocks, the economy is going nowhere, inflation is going nowhere, and wage growth is going nowhere – that’s why the RBA are cutting rates. The Liberals can’t fix everything. If the economy was flying interest rates wouldn’t be dropping.

The main play is betting on a low in housing-related stocks, rather than a boom in housing-related stocks, and for larger fund managers the main debate is whether to remain underweight the bank sector.

Read more from Marcus

Marcus Padley is the author of the Marcus Today stock market newsletter. To sign up for a 14-day free trial please click here.



Comments

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Bubb Bell

Please, please, please promise to follow up this article in 3 years. I'll look forward to it.

Walter Smith

And it is articles like this that reassures one that we are in an asset class bubble. If we can all just consider just for a a moment why it is projected the RBA "may" lower rates aggressively? Is it because we have a thriving economy? No. Is it because our savings ratio is high and we need to encourage consumers to spend? No. I find it fascinating how commentators like Marcus borrowed headline comments like those from CBA that we are seeing the 'highest amount of home loan applications in months' to project a bottoming out in declining property prices. What is this relative to? The virtual stop in applications over the preceding months. It would have only taking a relatively small sum to spike this back up. Then conveniently avoiding Matt Comyn's other comments in the same discussion where he warned that a larger cohort of Australians are savers so lowering rates will impact their spending. Did you conveniently avoid these comments Marcus and the knock on effects this would have? If we can now all join hands and stand at the edge of the cliff prepared to jump - this is exactly what recent APRA measures in combination of lower interest rates will ultimately do to property prices - yes such stimulus may prompt an uptick in property prices - but alas the speculators and the patsies in a wearily cold room of poker players.

Lloyd C

As they say, one sparrow does not a summer make. Probably more important to see what happens in China as 25% of Aussie exports go there. Most likely there's not enough private sector confidence for another bout of a domestic household debt binge. In that case, wait for the RBA to devalue the AUD with copious money printing.

Johannes Schunter

The optimism of the author is astounding, to put it mildly. A move to allow homebuyers to only put down 5%, and interest rates dropping below 1% for me is sign for a last enthusiastic hurrah in the market, before the inevitable catastrophe. Australian households are more overleveraged than US households in 2007. What the author interprets as positive signs, a clear warning signals to get out of Australian real estate (and bank stocks for that matter) before it’s too late.

James Weir

Almost all the reasons you've given for housing prices to start going up again are associated with being able to borrow more money, but encouraging people to join the party by throwing more debt into an already overindebted sector strikes me as a high risk strategy. While a few of the nation's capital cities boast better affordability statistics, Sydney and Melbourne residential property markets still sit toward the very top of almost any pricing metric you can think of: multiples of income required to borrow; household indebtedness to income; houshold debt to GDP; multiple of average wages required to buy the median priced home, or net rental yield. Banks love lending to home buyers because default rates remain very low and the return on equity they get very high. As for negative gearing, as any good adviser knows, you should NEVER base an investment decision solely on tax. Just because you CAN buy a house, doesn't make it good value.

Marcus Padley

I completely agree - something is wrong if interest rates are dropping to 0.75% by the end of the year, something that is not commensurate with price inflation, a growing economy and a bouyant housing market. But as an equity focused fund manager it is not the value of my house, or the housing market exposed stocks I'd worry about - if growth becomes the issue - its the growth stocks.