Australian House Prices Heading Towards More Sustainable Growth

Much of the financial news is often misleading. The way through all that is to understand the general framework of the economy, and to overlay all that with some chart reading.

For example, in October last year Macquarie analysts came out and made a call that Australian house prices would start to fall in March 2016, declaring the Australian housing cycle had peaked on a number of metrics.

Our economics team are forecasting quarter-on-quarter house prices to fall from the March 2016 quarter before beginning to recover from June 2017, with a 7.5 per cent fall from peak to trough.

Then came the shock of a rate hike from Westpac, also in October last year, moving interest rates higher independently of the Reserve Bank, in response to the tougher regulations to hold more capital.

That rise from Westpac really brought out all the property bears.

Credit Suisse quickly came out stating ‘Australian property is now riskier than the stock market.’

That’s saying something, coming after the August panic which saw ASX stocks plummet on concerns over China. Business Insider quoted the Credit Suisse analysts further,

Within the equity market, the increased correlation risk with housing means that investors should tread with caution around housing-exposed stocks, where valuations are yet to reflect the rise in risk.’

But here is the strange thing. Almost in complete defiance to the Credit Suisse warning, housing exposed stocks set about posting record profits.

Take Stockland [ASX:SGP]. On 10 February they announced half year profit up 50.6% to $696 million.

Net operating profit from the residential division was $98 million, up a whopping 45.5%.

From their retail shopping centres, the comparable sales growth in their smaller stores, which is a key indicator for consumer confidence, posted growth of 4.1%. That’s in line with the best growth they’ve had in four years. Overall there was improvement in department stores, discount department stores and supermarkets. This points to some confidence in the Australian consumer.

Brick supplier Brickworks Ltd [ASX:BKW] announced a record first half net profit of $75 million on 23 March, up 19.4%. The company is importing bricks from Spain and its plants are operating at full capacity, but it’s still struggling to keep up with demand.

Concrete supplier Adelaide Brighton Ltd [ASX:ABC] posted record revenues on 25 February, on the back of residential construction. Net profit was up 20.4% to $207.9 million. Adelaide Brighton chief executive Martin Brydon said he is struggling to supply enough concrete for the east coast housing boom.

Plumbing and bathroom products supplier Reece Ltd [ASX:REH] posted net profit up 12% to $89.9 million on 25 February, and opened four new branches.

So the call by Credit Suisse analysts to tread with caution around housing exposed stocks was, in hindsight, a bad one. Housing exposed stocks in general had been moving up for some time, and posted record profits.

So whenever you come across any such financial analysis, always bring up a chart.

The other point I take issue with in the Credit Suisse commentary, is that the share price valuations of those housing exposed stocks were not reflecting the rise in risk at the time.

That has never been my experience in the share market. I have found that the market knows well in advance any risks or rewards before it becomes common knowledge. You just have to trade for a while to know that. Far from reflecting the rise in risk, those valuations back in October were already reflecting the record half year results which were to come in February and March.

The Macquarie and Credit Suisse calls from October for a property collapse have not come to fruition.

Housing has come off those high rates of growth from last year, with the annual growth rate for capital cities coming in at 6.4% in the 12 months ended March, which is more in line with, but still above Australia’s 10-year annual growth rate of 5.4%.

Source: Australian Financial Review
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It’s a two speed economy, with the eastern seaboard strong and those states exposed to mining obviously a little softer.

Last year’s changes to investor lending, with higher interest rates and tighter standards, may be having some effects towards more sustainable growth. Australian houses prices are reverting more to the historical average, of sustainable house price growth.

To read more than that in the softening house price figures is fraught with danger. Despite some fund manager or analyst coming out and calling a property collapse every other week, a property collapse in 2016, looks unlikely.

Overarching this whole argument of a property prices is that the market is under supplied. It’s difficult to see property collapse, with all this pent up demand. There is some suggestion that inner city apartments are in over supply, that looks to be so, but for the rest of the market there is a significant housing shortage. That’s reflected in the company results and what the CEO’s in the housing sector are saying.

Added to a shortage in housing, we have strong employment numbers, low interest rates, Australia’s GDP growth continues to keep beating forecasts and the lower dollar and tourism is providing an enormous boost the Australian economy.

As well, Australia’s manufacturing index hit a twelve year high in March. Production and employment expanded strongly while new orders and exports jumped.

Then we have recent figures from ASX listed mortgage broker AFG which claims about 10% of the market, their books are showing loan-to-value ratios are at three-year lows, suggesting homebuyers are continuing to borrow within their capabilities.

For Australian house prices to collapse we need to see some distressed selling. RBA data on Australia’s housing loan market, which I wrote about for Cycles, Trends and Forecasts recently, suggests mortgages are far from being stretched.

As long as there is no significant jump in unemployment levels, then it’s hard to see where the distressed sales will come from.

Added to all that, the original cause of much of the market concerns, uncertainty over China, is also showing positive signs. China posted a significant upswing in economic activity in March, according to research by the Financial Times. China’s factory indicators point to a pickup in the Chinese economy, and China’s service sector also expanded last month.

A lot of financial news can be misleading. Things become a lot clearer once you have the framework of the economy. This framework has been distilled in the Cycles, Trends and Forecasts 18 year real estate clock, which you can find here.

Overlay that real estate cycle knowledge with a bit of chart reading, and you will be able to know what’s coming next for the economy. It’s profitable knowledge to have.

Terence Duffy

Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

Money Morning Australia