Australian house prices are cooling. Could these ASX stocks also be impacted?
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Australian house prices continue to rise, up by 1.5% in October and inching closer to a median value of $1m, according to the latest release from Corelogic.
October’s rise is similar to increases in August and September, but the pace of growth has significantly slowed from March when it was 2.8%.
Brisbane has taken over as the fastest growing property market with housing values up 2.5% in October.
Perth meanwhile, is at the other end of the spectrum, recording a decrease of 0.1% in October, its first negative growth since June 2020.
In Sydney and Melbourne, the growth rate has slowed down by more than half since the highs seen in March 2021, when they saw an increase of 3.7% and 2.4% respectively.
Regional markets have once again recorded a stronger trajectory than the capitals, with housing values up 1.9% in October compared to a 1.4% rise in capital city values.
The pace of growth is trending downwards, with some commentators predicting a property slump next year, and some even forecasting a bubble burst.
CoreLogic’s research director, Tim Lawless, agrees that downside risks for the housing sector are rising.
“Along with worsening affordability and higher supply, there is the potential for a further tightening in credit policy and, off the back of strong inflation readings, the possibility of an early rate hike is looking increasingly likely,” he said.
The market is indeed facing several headwinds, which include tighter regulations by the Australian Prudential Regulation Authority (APRA).
Last month, APRA told the big banks it expects it to increase the so-called serviceability buffer from 2.5% to 3% from the end of October.
The serviceability buffer assesses new borrower’s ability to make loan repayments if interest rates rise, or there’s a change in their personal circumstances. It’s a figure added onto the rate of an existing mortgage.
Australia’s inflation is also starting to rise, increasing the chances of an early RBA rate hike.
Last week’s ABS release showed Q3 CPI climbing by 0.8% qoq and 3% yoy, the result of rising fuel and housing prices.
The RBA’s monthly meeting later today will give investors an insight into whether the central bank will stick to its 0.1% cash rate policy until 2024, or raise it in order to cool down surging prices.
There are signs the market is already pricing in a rate rise.
CBA made the first move last week, raising all their major fixed rates, and Westpac followed by hiking its 2~5 year fixed home loan rates.
The RBA’s own research suggested that a 100 basis points (1%) increase in rates will equate to a 33% plunge in Australian housing prices.
Westpac’s chief economist Bill Evans predicted the market will enter a “correction phase” in 2023, while AMP Capital’s Oliver thinks that will happen earlier, by end of 2022.
“The return of immigrants may provide a source of support at some point,” Oliver said.
“However, storm clouds are starting to gather for the property boom and we expect a further slowing in price gains ahead of falls from later next year.”
A drop in Australian house prices will increase affordability especially for first time buyers, which could be a boon for mortgage providers like banks.
However a bust would indirectly affect other sectors of the economy, including retailers.
Giant Wesfarmers (ASX:WES) for example, could be affected if people buy less from its homeware business, Bunnings.
Other stocks that could be affected in a property downturn include (but are not limited to):
Shares in TPW have surged by almost 30% in one year, and it’s been one of the best stocks to own in the last five years, multiplying investors’ returns 86x.
The company has just closed out a record year, with revenue growing 85% and EBITDA rising to a record $20.5m, up 141% on prior year.
Furniture retailer Nick Scali’s share price is up 83% over the past year, as its profit doubled in FY21 to $84.2m underpinned by a 500% increase in online sales.
The company has plans to expand its ANZ footprint by opening 85 new showrooms across both markets, with the recent acquisition of Australian sofa retailer, Plush-Think Sofas, the first step towards that goal.
This is one the of most popular websites in Australia for property rentals. The website has 3.9 million unique visitors, which have increased steadily over the years.
It recorded record revenues in the last quarter despite fewer renters moving homes due to lockdowns.
The company is expecting a bumper Q3 once the traditionally quiet Christmas season is over.