Dion Hershan, Head of Australian Equities, details why the Australian housing sector appears well-placed to prove one of the many surprises of the COVID-19 pandemic.
To borrow a poker phrase, policymakers appear to be making an ‘all-in’ bet on housing.
Australian housing is a $6.8 trillion asset class (more than double superannuation), represents 53% of consumer/household wealth, and time after time has proven to be a key driver of consumer psychology and confidence.
It would be natural to assume in the midst of a pandemic and a deep recession, housing prices would be under pressure. Indeed, below are some of the quotes and predictions from the ‘experts’ in March and April of this year. A clear consensus emerged that housing starts would be smashed and prices would uniformly fall 10-15%, which appeared reasonable given they assumed unemployment was heading to 10-12%.
One survey of 25 economists in May 2020 predicted sharp drops in every Australian state and territory, with a majority declaring now was “not the time” to buy property. Specifically, Sydney was expected to suffer a 10.2% slide, Melbourne was expected to decline 9.2%, Brisbane 8.2%, Perth 8.4%, Adelaide 8.1% and Hobart 10.5%. One economist, whose speciality is forecasting house price trends, famously suggested in April that a local recession could prompt “a major event in the housing market, where Sydney and Melbourne prices could fall 30% from the peak”.
For the record, house prices have fallen just 3% from the peak price recorded in mid-April 2020 to early-October based on RP Data-Rismark daily house price data.
What was underestimated is the tsunami of policy responses for a sector the government appears to have deemed ‘too big to fail’, including:
- Mortgage deferrals, which have been used by 12% of mortgage holders;
- The ‘homebuilder’ program, which is budgeted at $680mn but we expect will easily exceed budget since (i) housing sentiment is improving, and (ii) it is an open-ended program which only requires construction contracts to be signed prior to Jan 2021;
- RBA rate cuts of 125 bps since June 2019, including 50 bps in March, have helped reduce interest rates on new fixed-rate loans by 65 bps and variable-rate loans by 30 bps since February. A mortgage can now be taken out at <2.5%; and
- A push by the Government to remove ‘responsible lending rules’, which could prove decisive in shifting the dynamics in the provision of housing credit.
The “major event” in the Australian housing market looks some way off. Australian mortgage interest servicing costs today sit 367 bps lower than the low-point post the GFC, and 26 bps lower than the low-point post the 1991-92 recession (refer Chart 1).
With a ‘housing put’ in place, the housing sector appears well-placed to prove one of the many surprises of this pandemic. The very long-term impacts come with higher risk and some uncertainty, but in the medium term are very positive for both activity levels and prices.
Our portfolios are well positioned to benefit from this outlook, with overweight positions in James Hardie, Reece and CSR – all of whom are meaningfully exposed to Australian housing. A stable to improving housing market also bodes well for the banks and reduces the risk of a blow out in bad debts.