Aus macro

CoreLogic house prices, and building approvals data, are out.

House prices

I am in the bearish camp for housing. However, for all the grim sounding headlines, things really haven’t even started yet.

The present downturn would be short and scarcely out of the ordinary, when viewed over time. Obviously, I think it will keep going, which is what makes it bad.

The reasons we think the downturn will continue are: a) mortgage rates are going to do some reasonable damage to affordability…

b) we are heavily indebted when compared to peers…

and c) our house prices are elevated when standardised against measures of income and/or rent.

If you were very levered to housing in Brisbane, I suspect you might be nervous.

Note that waiting for an Australian housing market downturn is a bit like waiting for Godot. Housing bears have grown old and passed, waiting.

To which someone like a Scott Sumner (the famous market monetarist) would say “if you have to wait 15 years for the bubble to pop it probably wasn’t a bubble”. And, it is very hard to credibly argue against that (indeed, if the values are markedly higher to boot, rather than just plateaued).

And yet..!

We are ~600bps underweight Aussie shares, largely due to the above. You can add in concerns about China (which are temporarily lessened as China reopens), but far and away, it’s the Achilles heel of housing that concerns us.

Even though our models warn us of the danger, decades have passed, and housing bears have aged out. So, we are mindful of not betting the farm, until we have clearer evidence of actual, rather than anticipated, damage. We think we will see it coming in a) retailer downgrades and b) rising bank bad debt commentary (which should turn bearish even before we see the upticks in their numbers).

Building approvals

The building approvals data, by number, is starting to look pretty depressed. And the cycle isn’t finished yet. The outlook for stocks like BLD, ABC, JHX, CSR remains fairly ill-looking.

I had thought there was a chance the large backlog of work to get through could mean a supportive tailwind to profits, even as the pipeline contracts. But the ability to manage margins in the face of volatile commodity prices crunched that idea.

And so the downturn in the pipeline is essentially set, and you didn’t get the EPS uplift of the HomeBuilder work flowing through.

Hence, very little to get excited about, I think.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.