Significant recent outperformance of building materials and housing development companies may indicate the easy money has already been made in the sector. While there’s some scope for further increases, this will be across fewer stocks and will be more muted.
The local sharemarket typically moves six to nine months ahead of the broader economy, but over the past two years, the overall sharemarket has been ahead by as much as 50 per cent. Many housing stocks have rallied ahead of company earnings, with price to earnings ratios expanding significantly in expectation of earnings growth.
Fundamentally, interest rates have remained at historical lows, with the cash rate remaining at 2.5 per cent for 13 months – the most recent change was a 0.25 per cent cut from 2.75 per cent in July 2013. This has meant the availability of debt has improved markedly for consumers, and competitive intensity is increasing in the banking sector.
Some of the major banks are now offering five-year fixed rates for as low as 4.99 per cent, something consumers have not experienced for decades.Post GFC, the banking sector more broadly has recapitalised and the composition of banks’ funding is in a much stronger position. Therefore, banks have been more willing to lend to consumers, particular for housing.
This, in turn, has led to a significant upswing in the residential property market nationally over the past 12 months, particularly in the Sydney market, the biggest in Australia. Following a decade of relatively flat housing growth – both in terms of prices and demand – the Sydney market has made a definitive comeback, buoyed by the NSW government’s proactive approach in releasing land which has proven to be effective in stimulating the first home buyer market.
But Australian consumers remain highly indebted, and have been going through a period of deleveraging since the global financial crisis. Within six years, the savings rate has gone from zero to 10 per cent, returning to the long-term average.
Homeowners have also been paying down their mortgages aggressively over the past decade and while people are still exercising caution, they have been deleveraging – a trend we expect to continue.
A further driver for the anticipated stagnation of housing stock prices is the outperformance of this part of the market relative to other sectors. The share prices of building products companies have jumped 157 per cent against the S&P/ASX All Ordinaries Index over the past two years. The stock prices of Fletcher Building Limited and James Hardie have also increased 63 per cent and 79 per cent respectively.
At the time of the GFC in 2008-09, many listed property developers and real estate investment trusts (REITs) collapsed due to substantial debts and many others were also trading at discounts to net tangible assets (NTA) of greater than 50 per cent in the small cap end of the sector.
This has since turned around, with some now trading at a premium to NTA, including residential developer Villaworld, which is trading at a 15 per cent premium to NTA.
Similarly, there have been large scale re-ratings in the REIT sector, which remains dominated by stocks trading at premiums. Mirvac Group and Stockland are examples.
So while the housing market will likely continue to remain strong over the next 12 months, housing stock prices have largely run their course.