Housing credit squeeze to hit builders, retailers and banks - Craigs
By Jenny Ruth
Nov. 23 (BusinessDesk) - A squeeze on housing credit in Australia as a result of its royal commission into financial services is likely to continue weighing on a wide swathe of share prices, according to Craigs Investment Partners.
The share prices of banks, building materials companies such as Fletcher Building and retailers are all in the firing line as the “wealth effect” of rising house prices evaporates, say analysts Roy Davidson and Mohandeep Singh.
Escalating house prices were already the target of regulatory action even before the royal commission was announced in December 2017. But during the past year residential property prices have fallen 7.4 percent in Sydney, 4.7 percent in Melbourne and are down 4.9 percent on average across Australia’s five main state capitals.
Growth in credit for houses overall in Australia has dropped from 7.5 percent in 2015 to 5.2 percent. Credit to investors has shown a more dramatic drop from 10.8 percent growth in 2015 to 1.4 percent.
A key finding of the royal commission has been that banks have been relying on a rule-of-thumb household expenditure measure to gauge borrowers’ living costs but that has systematically underestimated actual living costs. As a result banks had underestimated the riskiness of their lending
“Banks are now taking additional steps to verify actual expenditure levels and income in order to meet responsible lending requirements,” the Craigs analysts say.
“In sum, credit availability has diminished and household borrowing capacity has fallen” by around a quarter.
“While investor lending has been weak over the past few years – the main target of macro-prudential measures – the fact that we are now seeing owner-occupied lending soften at the same time is resulting in growth in total housing lending declining more sharply.”
The analysts expect Australian house prices have further to fall, citing national auction clearance rates falling from more than 70 percent to about 40 percent in Sydney.
“Auction clearance rates are an interesting statistic to watch as it can show a mismatch between the prices sellers expect to receive and what buyers are willing and able to pay and therefore which way house prices are likely to trend,” they say.
The big four Australian banks own New Zealand’s four largest banks and the Reserve Bank has also been taking measures to curb investor and other higher-risk lending. It has pushed annual credit growth in this country down from more than 9 percent to about 5 percent.
This has undoubtedly impacted house prices, particularly in Auckland, where prices are flat to slightly down. But credit growth seems to have stabilised and the central bank is starting to lift its macro-prudential lending restrictions.
This means the environment for the banks’ New Zealand subsidiaries has been more favourable than in Australia, which has been reflected in the banks’ recent profit reports, the analysts say.
“All in all, while not seemingly facing the same pressures as Australia, the environment in New Zealand is more challenged than it has been in recent years and we remain cautious on companies exposed to the property market,” they say.
“Factors such as the foreign buyer ban, slowing migration, tax changes and incremental supply should also prove to be headwinds for house prices.”
That means the analysts are cautious about building materials companies and those in the construction sector, as well as retailers such as The Warehouse Group.
“The retail sector typically benefits from the wealth effect from higher house prices; as house prices rise, people feel wealthier and are likely to borrow more to spend a greater amount on consumer goods, renovations, a new car, etcetera,” they say.
“While retail spending has held up reasonably well to date, we expect that this wealth effect will diminish in the coming years.”
In Australia, households have essentially funded higher consumption levels by borrowing, taking Australia’s household-debt-to-income ratio to just below 200 percent – New Zealand’s is slightly lower at 166 percent.
The slowing housing market will also present headwinds to the retirement village sector, the analysts say.
“While we are attracted to the sector’s proven business model, we expect retirement village/aged care developers will face headwinds from a softer property market,” they say.
“Our preferred exposure is Ryman Healthcare which is the industry standard operator with a continuum of care model.”
Ryman has just reported a near 13 percent increase in first-half net profit. It is forecasting a 10-17 percent annual increase and says it doesn’t expect its profitability will be affected by any foreseeable housing market downturn.
The analysts say Metlifecare is their least preferred stock in the sector, “given its high weighting” towards lifestyle-type villages and because of its high weighting towards Auckland.