Housing collapse will hurt retailers

If houses prices fall further they are going to bring a string of related industries down too.

If houses prices fall further they are going to bring a string of related industries down too. What’s more, the sectors at risk stretch well beyond builders and property companies: high-profile retailers are exceptionally exposed.

The last time house prices fell significantly — in 2011 — the stock prices at leading retailers Harvey Norman and JB Hi-Fi fell hard and fast.

To spell it out: in the 18 months from June 2010, house prices fell a modest 5 per cent. Over the same period the total return of shares in JB Hi-Fi and Harvey Norman fell 35 per cent and 39 per cent respectively.

What will happen this time around? Certainly the consensus is that house prices are about to take another tumble, but this time any future slump will be accompanied by much higher levels of household debt.

Stockbroker UBS rang the bell calling the top of the housing boom a month ago and since then everyone has been falling over in the rush to tell us how sharply house prices will drop.

Even the Treasurer Scott Morrison says house prices are cooling already.

The latest broker to join the dots and forecast a fall in house prices is Citi, which has forecast a drop of 7 per cent by 2018.

The global broker suggests that retailer JB Hi-Fi and Harvey Norman may now come under renewed pressure, but that ­lesser-known home furnishing operators such as Beacon Lighting and Nick Scali could also face so-called “downside risk”.

“House-led retailer share prices are highly leveraged to house prices — the leverage has been positive for the last four years, but now appears to be turning,” the broker explains.

It also pinpoints two property trusts which now have their highest exposure to the residential sector since the GFC — Mirvac and Stockland.

As analysts suggest the worst price falls will hit inner-city Brisbane and Melbourne apartment complexes, a Mirvac development at Yarra’s Edge Melbourne docklands has been cited as a worrying example. Citi reports: “Only two apartments were pre-sold between June 30 and December 31 last year”.

In contrast, Mirvac’s Green Square development in Sydney sold out on release during the same period.

Citi says investors should “scale back” investments in residential property, building materials and retailing.

According to the broker, as the cash available to consumers hits multi-year lows, the key issues facing vulnerable stocks are: 1. low wage growth; 2 Low employment growth; 3 Rising mortgage costs; and 4. Rising inflation. It suggests growth in non-food spending could be as low as 1.5 per cent (less than GDP growth).

Citi says households face a material step change in energy utility costs, with electricity and gas prices to rise 10 per cent per annum for the next three years.