Conditions ‘positive and improving’ for building sectors

A boost in property industry activity might lift property-exposed stocks, particularly housing companies and suppliers.

A boost in property industry activity might lift property-exposed stocks, particularly housing companies and suppliers. Picture: Brendan Radke

A boost in property industry activity on the back of successful stimulatory monetary policy is expected to drive a lift in the performance of property-exposed stocks, particularly housing companies and suppliers.

Conditions were positive and improving in three of the four building sectors through December and January, according to the latest Australian Performance of Construction Index. Apartment building showed some shrinkage, while the strong building activity seen in the months prior began to slow. The slower recovery of the commercial and engineering construction sectors continued for a third consecutive month.

Australian Bureau of Statistics data showed building approval figures strengthened across the board in December, with national total dwellings up 11 per cent in seasonally adjusted terms.

Maree Kilroy, Economist for BIS Oxford Economics, said renovations approvals month-on-month increased 8 per cent in December, coinciding with the end of the HomeBuilder scheme.

“The late surge in HomeBuilder applications before the December 31 deadline for the full grant is still yet to fully materialise in the approval data and this record may still be topped in coming months,” Ms Kilroy said.

“The extension of the HomeBuilder program, combined with record low borrowing costs and rising optimism in the property market evident through robust price growth materialising nationwide, is expected to see new house and renovation activity hold strong well into the second half of this year.”

The federal government’s First Home Loan Deposit Scheme is also expected to give a boost to the market segment when it launches its third round at the start of the financial year, having previously helped more than 15,000 properties settle since January 2019.

Residential developers Stockland and Mirvac outperform when interest rates are low and housing markets and auction clearance rates run hot, analysts said.

Both companies are stepping up sales of housing lots and each has bought new sites in Sydney and Melbourne as they look to capture the buyers getting into the market.

Investors expect they will beat earlier sales forecasts issued in the midst of the coronavirus crisis as confidence floods into both shares and the direct market.

Some companies are also stepping up to develop more units and global company Lendlease is bringing forward the release of a luxury tower at Sydney Harbour’s Barangaroo precinct after selling out 85 per cent of the first tower it unveiled.

The lift in housing approvals is also helping companies including Boral and Fletcher Building that track this activity.

Playing the housing boom story is a classic move for retail investors but it can be fraught with risk as some projects miss the mark and suffer costly write downs. But for now they are taking the plunge.

In the Reserve Bank’s statement on Tuesday governor Philip Lowe said that financial conditions remain “highly accommodative, with lending rates for most borrowers at record lows and asset prices, including housing prices, mostly increasing”.

AMP Capital chief economist Shane Oliver said the RBA still does not appear too concerned about the pick up in house prices just yet and he said growth in total housing debt is still low.

He warned the central bank‘s stance could shift towards making interest rate rises if home prices ran too hard.

“However, if the economy continues to surprise on the upside like it has been lately helped along by vaccines in the second half then there is a good chance that the first rate hike will be in 2023 or maybe even late 2022. But that is still a long way off and so mortgage rates will remain low for now,” he said.

“One factor which could cause the RBA to reconsider is if the property market continues to hot up – as it has been doing lately with strong house price gains and record monthly housing finance commitments,” Mr Oliver said.

He suggested that the government may seek to rein in shorter-term stimulus packages for buyers or seek to restore prudential standards.

“In the first instance though this should drive a wind back of government homebuyer incentives (with some set to expire anyway), but if this is not enough, pressure on the RBA and APRA to re-tighten lending standards may become apparent in the absence of an ability to raise interest rates given weakness in the broader economy. This could become more of an issue later this year or through 2022,” Mr Oliver said.

But for now share market investors are driving housing stocks up with Stockland up 5 per cent over a month although Mirvac has slipped.

They are both benefiting from macro tailwinds and UBS analysts said that December home loans have increased 59 per cent since May and that demand for housing credit was now being driven by both owner-occupiers and investors.

The market has taken off on the back of the HomeBuilder stimulus package and associated state packages, with first homebuyer loans skyrocketing so they are up 64 per cent year on year to now represent around 25 per cent of loans.

UBS economists expect to see national housing price growth of 5-10 per cent with an upside risk case of 10 per cent-plus. Investors are also coming back into the market and neither major party would campaign ahead of the next federal election on changing negative gearing rules, the investment bank’s trading desk said.

“The RBA has previously commented that rising risk asset prices are not overtly a threat to financial stability and their focus will remain on actual inflation,” UBS said.

With rates to stay low for now the firm said at a stock level to watch for Stockland selling more than 6,000 lots this year and next and the potential for margins to move higher than consensus estimates.