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.
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