The Wrap: Property, Mortgages And The Consumer

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Weekly Broker Wrap: Equity strategy; Australian property; interest-only mortgages; the Australian consumer.

-Migration wave could inject $8.1bn into Brisbane, SE Queensland housing
-Increase in A-REIT buy-backs could underpin outperformance
-Are interest-only mortgages misunderstood?
-Cost-of-living pressures expected to pinch consumer sector
 

By Eva Brocklehurst

Migration

Is there another interstate migration wave heading to Queensland? While Sydney house prices are nearly double those of other capital cities, job creation is occurring in Queensland. Macquarie notes, in the past, when these factors have aligned, on average 134,000 people have trekked north over a three-year period, predominantly out of NSW.

Over the next few years, the broker suspects a similar interstate migration could inject around $8.1bn of equity into the Brisbane and South-East Queensland housing market. The equivalent drain on the Sydney market would be much smaller, and is not large enough to affect the city as the money leaves town.

Nevertheless, a typically large inter-state migration cycle may be large enough to help bring Brisbane's apartment supply into balance by absorbing some of the current oversupply and putting upward pressure on house prices.

Macquarie expects that provided there is no global economic shock, this migration wave may leave the Australian economy in better shape, as it spreads housing equity around the country.

The broker prefers these stocks from the list exposed to interstate migration to Queensland: Adelaide Brighton ((ABC)), Boral ((BLD)), Mantra Group ((MTR)) and Star Entertainment ((SGR)). Bank of Queensland ((BOQ)), Suncorp ((SUN)), CSR ((CSR)), Cromwell Property ((CMW)), and Ardent Leisure ((AAD)) should also benefit.

Deutsche Bank also retains a positive view on Queensland, reasoning that cheap housing will mean interstate migration continues to lift. Moreover, the broker notes Queensland job growth has actually led all major states over the past year, with the industries that are hiring similar to the national level: construction, tourism and health/education. This supports the broker's positive view on Stockland ((SGP)).

One insight from the data the broker takes is that jobs growth is skewed to lower-paying industries and the lack of quality in jobs creation has been reflected in underemployment, which is broad-based by state. This lower quality jobs creation is a contributor to soft wages growth and, in turn, weighs on consumer spending. Deutsche Bank does not envisage firmer wages growth in the near-term and is generally cautious on domestic exposure.

Nevertheless, the broker is also hesitant to load up on defensive stocks, given the earnings revision momentum is worse than for cyclicals and valuations are neutral versus cyclicals, rather than cheap. A firmer Australian dollar is a headwind but the broker does not envisage this getting worse. At the stock level Deutsche Bank likes Aristocrat Leisure ((ALL)) Amcor ((AMC)), Boral, and James Hardie ((JHX)).

Australian Property

Citi observes buy-backs have become a more common theme in the Australian property sector since July, as Vicinity Centres ((VCX )) and Investa Office ((IOF)) have announced programs. The broker estimates progress to date has generated accretion to earnings per share of around 0.9% and 0.4% for Investa Office and Vicinity Centres respectively.

The numbers may appear modest, but the broker notes small revisions to earnings per share continue to have a magnified impact on share prices in the A-REITs sector, given relatively low earnings dispersion. Moreover, these results have been largely achieved in space of two months and active execution, from these two names in particular, suggests there may be more upgrades to come.

The broker also finds it unusual that each of the A-REITs conducting buy-backs has underperformed the sector and suspects future outperformance will occur, supported by upgrades to earnings per share.

Interest-Only Mortgages

UBS asks whether interest-only mortgages are being misunderstood. In the broker's Australian mortgages survey only 23.9% of respondents by value stated they had interest-only mortgages, substantially lower than the APRA system statistics at 35.3%.

The broker's concerns centre on the likelihood that around one third of borrowers who take out an interest-only mortgage have little understanding of the product, or that their repayments will jump by between 30-60% at the end of the interest-only period, depending on the residual term.

In the broker's survey, of all the interest-only customers, 53% said they were reacting to higher interest rates by reducing consumption while 24% were considering switching to a principal & interest loan.

While these IO loans are well secured, UBS believes many borrowers may still face substantial stress as rates rise, or when the loans revert to principal & interest. This suggests that the full impact of macro prudential policy tightening is yet to hit home and mortgage mis-selling and responsible lending obligation risks cannot be ignored.

Australian Consumer

Morgan Stanley also suspects that higher mortgage rates will put pressure on household consumption and encourage borrowers with interest-only loans to switch. As the environment deteriorates and consumers succumb to cost-of-living pressures borrowers are expected to shift from interest-only to principal & interest loans.

The broker believes JB Hi-Fi ((JBH)) and Domino's Pizza ((DMP)) are the most exposed to a slowing "young" consumer. This demographic is likely to be cutting back on expenditure more so than other cohorts as they have lower home equity and a higher proportion of interest-only loans, amid fewer savings.

Retailers in highly discretionary categories, such as holidays and entertainment, may also feel the pinch and the broker suspects Flight Centre ((FLT)), Star Entertainment and Crown Resorts ((CWN)) are in this category.

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