The Wrap: EVs, Health Insurance & Real Estate

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Electric vehicles; health insurance; credit crunch; and real estate listings.

-High barriers still exist to electric vehicle take-up
-Health insurer margins may come under pressure with Labor's proposed 2% cap
-Continued weakness in home loan growth suggests credit tightening playing out
-Longer “live” listings unlikely to benefit REA Group and Domain
 

By Eva Brocklehurst

Electric Vehicles

Cars that can drive for long distances without charging are being produced. So why has demand not taken off? This is the question Citi asks and suggests four main barriers to adoption exist before consumers will fully embrace the technology.

These include the range of travel, support infrastructure, battery degradation and cost. Looking at current demand, the broker finds the very early stages of adoption exist, with battery electric vehicles and plug-in hybrids making up just 1% of new car sales globally.

In order for penetration to truly increase demand, "pull" factors will need to take over. In this scenario, the broker suggests consumers need to believe the utility of such vehicles is higher than conventional vehicles and the price of batteries needs to come down enough so that a cost parity is reached.

Moreover, a network of charging stations will need to be installed to alleviate fears of "plug-in" being unavailable. Citi's base case scenario is for 10% battery electric vehicle penetration by 2030 and Europe and China remain the largest markets.

Health Insurance

Macquarie reviews the growth trends in claims across the private health insurance market and finds additional work days add pressure to the margin outlook. Traditionally, the re-pricing mechanism is pushed by costs so claims owing to additional work days would lead to higher premium increases.

This would keep margins relatively consistent. However, in the context of Labor's proposed 2% price cap for two years, should it form government after the next federal election, claims experience would not influence future price rises and margins could come under pressure.

Macquarie estimates the one-off impact could be around -100 basis points for both Medibank Private ((MPL)) and nib Holdings ((NHF)) in FY20, prior to any favourable claims trends and additional cost reduction efforts.

Credit Crunch

Home loans are the main indicator that UBS is watching for signs that its credit tightening thesis is playing out. Continued weakness in home loans growth in April suggests this is occurring even before the full impact of any macro prudential efforts.

The broker continues to expect loans growth to fall by -20% and credit growth to slow enough to be flat over the next year. House prices are expected to be down more than -5%. This suggests the Reserve Bank of Australia is likely to maintain the cash rate at current levels until the second half of 2019.

The total value of home loans, ex refinancing, declined in April by -0.4% after a -4.8% drop in March. The year-on-year level improved slightly but remains negative at -5.8%.

The prior lift in home loans was a driver of booming house prices so, in expecting loan growth to fall further as tighter lending standards come into force, UBS expects house prices to continue to decline.

First home buyers remain the brightest spot, amid support from stamp duty exemptions, and this segment's share of total loans has increased to around 12%, the highest since October 2012.

Real Estate Listings

Does the cooling housing market affect REA Group ((REA)) and Domain Group ((DHG))? UBS suggests the logic that these parties will benefit from a cooling market because listings remain on the market for a longer time is flawed.

Longer-time-on-market has historically been viewed as an offset to lower new listings but analysis signals this may not be the case. Even if there is a correlation, UBS suggests there tends to be a lag. In certain years, particularly in Sydney, when house price growth has stalled there was an initial improvement in new listings.

However, as house price growth remained consistently weak the supply and new listings eventually normalised and began to fall. The broker emphasises it is not forecasting a housing downturn or a sustained fall in residential new-listing volumes.

UBS also notes that internationally, the number one player has proven more resilient through industry shocks, as when agents/vendors are forced to rationalise spending they tend to choose the number one player over the number two.

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