Macquarie and Credit Suisse are among those predicting a residential property market downturn in Australia, nothing serious, but a potential fall in prices that could have important implications for the local sharemarket.
Credit growth, auction clearance rates and house prices show signs of slowing due to curbs on investor lending and foreign buying, as well as China’s anti-corruption campaign, currency devaluation, heightened capital controls and economic slowdown.
Macquarie expects house prices to fall 7.5 per cent from March next year to June 2017 as population growth slows to levels that won’t justify the major housing supply surge due in 2016. While the overall direction of equities will be dictated by global interest rates and China’s economic growth rate, the housing boom gave a major boost to banks, property trusts and residential building construction companies that together account for a large chunk of the sharemarket.
The good news is that most of these sectors have had a sizeable fall, with banks retreating an average 26 per cent from their highs. Macquarie says value has emerged in the banks. It has ‘outperform’ ratings on CBA, Westpac and NAB, and a neutral stance on ANZ, but it lowered its price targets and shifted its order of preference for the banks after predicting a housing downturn.
Macquarie also sees negative implications for building materials suppliers such as CSR and Brickworks, while James Hardie remains its top pick thanks to its US housing market exposure. On a broader view, Credit Suisse notes that home-buying conditions in Australia have deteriorated sharply, and that surveys point to very weak home-buying sentiment in NSW, which previously benefited the most from investor and foreign buying.
And housing risk -- gauged by the dispersion of home-buyer sentiment across the states -- recently jumped to a record high of 30 per cent, exceeding the implied volatility of the S&P/ASX 200 share index, now at 21 per cent, the broker says.
On this basis, the concern is that housing is no longer a ‘safe haven’, yet leverage has built up more in housing than equities on the assumption that volatility in housing would stay low.
“If high risk continues in housing, we could see rotation out of the asset class (into equities), but it is difficult to diversify away housing risk because housing and equity risk have become highly correlated,” Credit Suisse strategists Damien Boey and Hasan Tevfik say.
In other words, the diversification benefit of owning a home and shares is dissipating. That’s partly due to the increasingly skewed composition of the equity market -- banks, property developers, builders and property trusts now account for almost 40 per cent of the S&P/ASX 200 versus a puny 15 per cent for the resources sector, so the sharemarket is more ‘housing exposed’ than normal.
Because of this, the risk is that a sharp movement in house prices also triggers a sharp movement in the equity market, so to maintain a degree of diversification, households need to own stocks that are not directly exposed to the housing cycle, Boey and Tevfic say.
Also, while policymakers would probably welcome a cooling in the housing market, and more rational pricing of risk, they will probably cut interest rates again to deal with the NSW housing slowdown, which would favour defensive ‘bond proxies’.
This commentary was first published by The Australian and is reproduced here with permission.