These stocks keep ‘defiantly’ moving higher

  • Riskier than the stock market?
  • The different story Australian companies are telling
  • Your Australian property update

Every day the constant calls for an Australian property collapse look more and more ridiculous.

Recent developments planned on the Sunshine Coast, for example, highlight just how much is going on all over the place.

The airport in Maroochydore is on track for a $347 million runway extension. This means it will be capable of servicing large aircraft like the Airbus 330, and Boeing’s 787 and 777 models.

The Brisbane Times estimates this could mean half a million more visitors a year by 2040. It’s due to be finished in 2020, should it get the final tick of Federal approval.

That might be one reason why Starwood plan to open a $100 million Westin hotel in Coolum by 2021 as part of a $1 billion mixed use development. We find out if the local council gives it the go-ahead later in the year.

And then, to top it all off, The Australian Financial Review reported last week that the Sunshine Council plans to build a new greenfield $2.1 billion ‘CBD’ over 53 hectares.

We can also throw into the mix the $1.8 billion Sunshine Coast University Hospital, due to open in five months, and the possibility of a light rail network within a decade.

If these go ahead, land values on the Sunshine Coat simply must go higher.

But, of course, calls for an Australian property collapse will keep going on. They never seem to end.

I’ll get back to that in a moment. First let’s have a look at the fallout from the British vote to leave the European Union last week.

Markets

Well the markets were sure caught on the back foot by the old Brexit. That’ll teach investors to pay too much heed to opinion polls.

Having priced in a likely victory by the ‘Remain’ camp, US markets took some heavy losses to close last week. The Dow Jones Industrial average shed 3.39%, the S&P 500 lost 3.59%, while the NASDAQ dropped 4.07%.

The story in the European exchanges was even bleaker. Following Thursday’s gains, the German DAX lost 6.82% and the French CAC 40 took a real thumping, shedding 8.04% on Friday.

Investors in British listed stocks appear to have priced in a better chance of an exit. Likely supported by a plummeting pound, the FTSE 100 ‘only’ closed down 3.15%.

Meanwhile the Asian markets appear to be acknowledging a bit of an overreaction in their dramatic sell-offs last week. As of writing, the Nikkei 225 is up 2.02% and the Shanghai Composite is up 0.86%.

Over here in Australia the ASX 200 is also clawing back from Friday’s losses. At the moment it’s at 5132 points, up 0.41%. Have a look at the five day chart below.

You can see how the market opened up slightly higher on Friday morning on erroneous speculations that the Brits had opted to stay in the EU. Any guesses when news of the ‘Leave’ vote came through?



chart image

Source: Yahoo Finance
Click to enlarge


As you’d expect, gold has enjoyed all the uncertainty. Though down a bit since Friday’s peak, gold is currently still fetching US$1,326.86 per ounce.

Now back to the Aussie property market…and the reasons why we don’t see any signs of an imminent collapse in the cards.

Riskier than the stock market?

The way through all of the mainstream noise trumpeting a housing collapse is to understand the general framework of the economy, and to overlay all that with an understanding of stock charts.

Let’s show you another dud call on Australian housing.  

In October 2015, Macquarie analysts came out and made a call that house prices would start to fall in March 2016. They declared the Australian housing cycle had peaked on a number of metrics. From Macquarie:

Our economics team are forecasting quarter-on-quarter house prices to fall from the March 2016 quarter before beginning to recover from June 2017, with a 7.5 per cent fall from peak to trough.’

Then came the shock of a mortgage rate hike from Westpac, also in October last year. They moved interest rates higher independently of the Reserve Bank. That was in response to the tougher regulations requiring banks to hold more capital.

That mortgage rate rise from Westpac really brought out all the property bears.

Credit Suisse quickly came out stating, ‘Australian property is now riskier than the stock market.’

That was saying something, coming as it did after the August 2015 low, which saw ASX stocks fall on concerns over China.

But here is the strange thing. Almost in complete defiance of the Credit Suisse warning, stocks exposed to Australia’s housing sector continued to move higher.

The different story Australian companies are telling

Take Stockland [ASX:SGP] as just one example. On 10 February SGP announced that half year profit was up 50.6% to $696 million. Net operating profit from the residential division was $98 million, up a whopping 45.5%.

From their retail shopping centres, the comparable sales growth in their smaller stores — a key indicator for consumer confidence — posted growth of 4.1%. That’s in line with the best growth they’ve had in four years.

Overall there was improvement in department stores, discount department stores and supermarkets. This points to some confidence in the Australian consumer.

Australian brick supplier Brickworks Ltd [ASX:BKW] announced a record first half year net profit of $75 million on 23 March, up 19.4%. The company’s plants are operating at full capacity, but it’s still struggling to keep up with demand, and has been forced to import bricks from Spain.

Concrete supplier Adelaide Brighton Ltd [ASX:ABC] posted record revenues on 25 February, on the back of residential construction. Net profit was up 20.4% to $207.9 million.

Adelaide Brighton chief executive Martin Brydon said he is struggling to supply enough concrete for the east coast housing market.

Plumbing and bathroom products supplier Reece Ltd [ASX:REH] posted net profit up 12% to $89.9 million on 25 February, and opened four new branches.

So the call by Credit Suisse analysts to tread with caution around housing exposed stocks was, in hindsight, a bad one. This is something you could have pointed out to them yourself.

Why do we listen to these analysts?

The Macquarie and Credit Suisse calls from October 2015 for a property collapse have not come to fruition. And the next shrill round of calls for a property collapse in Australia will likely fall just as flat.

Your Australian property update

Sure, housing in Australia has come off those high rates of growth from last year. The annual growth rate for capital cities came in at 6.4% in the 12 months ended March, which is more in line with, but still above, Australia’s usual 10-year annual growth rate of 5.4%.



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Source: The Australian Financial Review
Click to enlarge


It’s a two speed economy, with the eastern seaboard strong, and those states exposed to mining obviously a little softer.

Last year’s changes to investor lending, with higher interest rates and tighter standards for property investors, may be having some effects. House prices are reverting more to the sustainable growth level of the historical average.

Reading more than that in the softening house price figures is fraught with danger. Despite some fund manager or analyst coming out and calling a property collapse every other week, a property collapse in 2016 would be outside the usual historical context.

Possible…but exceedingly unlikely.

There is the suggestion that inner city apartments are in oversupply. That looks to be so, but for the rest of the market there is a significant housing shortage. That’s reflected in the company results and what the CEOs in the housing sector are saying.

Australia has strong employment numbers and low interest rates. Australia’s GDP growth continues to beat forecasts, and the lower dollar and tourism are providing an enormous boost to the Australian economy.

Then there’s Australia’s manufacturing index. It hit a 12 year high in March. Production and employment expanded strongly, while new orders and exports jumped.

And we have the recent figures from ASX listed mortgage broker AFG, which claims about 10% of the market.

Their books are showing loan-to-value ratios are at three-year lows, suggesting homebuyers are continuing to borrow within their capabilities.

For house prices to collapse we’d need to see some distressed selling. As long as there is no significant jump in unemployment levels, then it’s hard to see where the distressed sales will come from.

As you may know, my colleagues and I track the real estate cycle carefully over at Cycles, Trends and Forecasts. If you want to know where property prices are likely headed in 2017 and beyond, you can find out more here.

Regards,

Callum Newman