Weekly Reports | Apr 12 2019
Weekly Broker Wrap: housing; Oz election; regional banks; and child care.
-Sentiment and serviceability continue to deteriorate in Australia's housing market
-Key impact on investors from a change of federal government to the ALP likely to be in area of negative gearing, capital gains tax and franking credits
-Labor's NBN policy could benefit telecommunications industry, Ord Minnett suggests
-Regardless of a level playing field, Credit Suisse still favours the major banks
By Eva Brocklehurst
Morgan Stanley observes sentiment and serviceability continued to deteriorate in the Australian housing market in the first quarter of 2019. Housing weakness is expected to persist through to the end of the year, with further downside to both approvals and prices.
Credit supply, meanwhile, remains tight and little relief is expected. The pipeline of housing construction remains elevated and the supply surplus that drove weakness in the March quarter is unlikely to narrow until the end of 2020, even with the sharp decline in approvals.
In the case of mortgage serviceability, this continues to worsen and reflects high leverage, given the increased lending rates and low income growth faced by households.
The decline in national house prices since late 2017 has improved some aspects of housing demand. Rental conditions have also become better. Yet the broker observes these are relatively incremental drivers of housing conditions overall.
The broker's modelling is yet to point to a trough in prices. Real house prices are down -11.6% from their peak and the risks remain to the downside. Eventual cuts to the cash rate by the Reserve Bank of Australia will provide some support, but Morgan Stanley does not expect this will provide the same boost to credit as in previous cycles.
While Australian housing starts are estimated to fall to 150,000 units next year Macquarie expects low single-digit growth in US housing starts in 2019. US growth is supported by demographic factors underpinning demand and lower interest rates are also helping the recovery.
The broker continues to believe James Hardie ((JHX)) is well-placed, amid receding cost pressures. The broker believes the company's US$100m cost reduction target for manufacturing is achievable.
Meanwhile, Reliance Worldwide ((RWC)) has been weak, along with other Brexit-exposed ASX names, yet the uncertainty in the UK macro context does not seem to be affecting activity, currently.
The broker notes interesting developments in the competitive landscape in the US, in keeping with a long-held view on the competitiveness of the company's offering. The broker finds the Reliance Worldwide valuation particularly attractive.
Australia's government has called the federal election for May 18. Recent polls are consistent with a change in government to the Australian Labor Party. UBS considers policy differences are potentially material for the economy and investors.
The Labor Party does not support the much larger future tax cuts proposed by the government from 2022, and also plans to reintroduce the 2% deficit repair levy for those earning over $180,000 per annum.
The Labor Party is also more likely to regulate wages and will direct the Fair Work Commission to consider a living wage. However, the living wage would not apply to all awards and UBS suspects the impact on overall wage rates could be surprisingly small, particularly given a view of a rising unemployment rate going forward.
The Labor Party also proposes to limit negative gearing to new houses purchased from January 2020 and halve the capital gains tax concession to 25%. Existing arrangements are expected to be grandfathered. UBS assesses the policy could reduce the average investor's assessable income by -3-4% and borrowing capacity by around -10%.