When we talk about house prices remember we are not referring to selling of the same house so measurement of price change is very imprecise. But like any good asset it will have a price set by supply and demand. Demand is currently being affected by income constraints and supply is adjusting. Those that must sell will lead the market down as bargain hunters prey on the vulnerable. We expect rational sellers will withdraw their properties or not adjust their price. Evidence of that is now occurring with Realestate.com.au publishing that their residential listings were down by 33% last month.
We expect housing to fall 5% but recover by Christmas. By December there wont be any reason for prices to be sustainably effected. To read the full note of our view of housing please click here.
Be proactive about your investments
This is not a time to be lazy about investing. The risks are too high for “set and forget” investments. Ideally you need to be prepared to trade the peaks and troughs to reduce the risk and make your investing safe and profitable.
Winners and losers?
Real Estate Services Market
They will have to overcome the public gathering restrictions and the attitudes of the general public. Given the two distinctly different 6 month periods we are forecasting, we expect the first 6 months will be tough in real estate services. It will be hard to make good gains on stocks like realestate.com.au and Domain Group. If our view holds it will be a much better second 6 month period.
Banks
Believe it or not, banks are the biggest residential real estate participants in the Australian market. They also make up approximately 25% of the ASX200 index. Due to a significant lack of competition there are very few banking markets as profitable as ours in the world. Banks have been blessed with strong underlying growth in demand for credit and strong housing returns. They have also enjoyed cheap sources of
funding and less reliance on equity raisings.
But whilst dividends paid have been extremely high, the capital returns have been far from stellar over 5 or 10 years. Yet they are very well held by retirees and those seeking chunky fully franked dividends. In the past it has always troubled us at Pythagoras – if they weren’t so large in the index (25%), would they be so well held and so “relatively” expensive.
Banks are being used as the shock absorber for the economy. They have effectively been “asked” to be generous to clients by taking some of the stress out of repayments, for now. When you consider the alternatives rationally what choice did they really have. They could not fire sale people’s homes by foreclosing – because there aren’t enough buyers. Everyone is in the same predicament.
Banks therefore have taken some of the stress from housing prices but added stress to bank balance sheets. To deal with bad and doubtful debts banks, have begun selling assets and raising equity to face the possible wave of bad debt. The CBA alone just raised a bad debt
provision of $1.5bn.
By the government asking the banks to wear more pain than normal, shareholders are being asked to shoulder the burden. Therefore, if you a bank shareholder you have a choice – stay or go?
In sum, the coming period for banks (CBA, ANZ, NAB, WBC, BOQ, SUN) is a tough one.
Build versus renovate?
We expect that new building starts are going to be slower than previously expected. This may mean the bottom of the housing market is more like 2022.
Those who aren’t forced sellers will wait for their price or withdraw their property from sale. If people take their homes off the market it is likely they will “make it more desirable” for themselves or the next buyer by updating their home. Those who need a bigger home may add an extension. The stamp duty, agents fees and all the attending costs could be used to renovate – a repaint, new fittings and fixtures.
The obvious beneficiaries of this trend would be Bunnings – through Wesfarmers – and GWA (fixtures and fittings for bathrooms and kitchens).
Construction
Government led construction is likely to work its way into the economy and find success as governments begin to spend to create infrastructure as a path forward…… Those focused on construction materials including aggregate, cement, and concrete via infrastructure spend could do well. Boral is well placed to benefit.
Summary
With our housing view we see opportunities unfolding for the coming year. But this is not expected to be a straightforward year to be an
investor. Careful stock selection is critical. Then the ability to generate your return from buying low and selling high will be an important source of return.
If you would like assistance to do this please reach out. We can be contacted on Michael@pythagorasinvesting.com to explain how easy this can be using our volatility indexes!
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26/5/2020