In Brief: House Pricing, Construction, Inflation

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Weekly Broker Wrap: house prices set to soften, construction faces further collapse, inflation impacts grocery prices.

-House prices remain steady as the rental market further tightens
-Experts warn to watch for warning signs of further collapses in the construction industry
-Inflation hits grocery shelves in the quarter, grocery retailers likely to gain margin improvement

By Danielle Austin

House prices to soften as rate hikes take hold

While house prices largely remained steady through April, increasing just 0.3% nationally for a third consecutive month, ahead of the cash rate rise announced this week the Morgan Stanley experts warned rate hikes would accelerate softening in house pricing.

The soft month sees the annual price growth slide to 14.6%, while geographically, growth was strongest in Brisbane at 1.7%, while the Sydney market slipped -0.2% during the month. On surveying the market, Morgan Stanley found the sentiment that now is the right time to buy has declined to a 14-year low.

Comparatively, not only does the rental market remain tight, but vacancies fell to 2.8% during the month, the lowest level seen post-covid, while half of the capital cities retain vacancy rates below 1%. The tight market is encouraging the continuation of rental price rises, with asking rents up 14% nationally compared to a year ago, and Morgan Stanley analysts expect the rental market to remain strong as immigration recovers.

Threat of construction insolvencies looms

The combination of labour constraints and cost inflation is proving untenable for a number of high-profile Australian construction companies as the industry attempts to recover from covid, and industry experts warn not only that further insolvencies in the sector are likely in the coming year, but that collapses in the construction sector could have widespread flow-on impacts. The cash rate hike announced just this week could cause further pain, with construction companies inevitably exposed to lending rates.

Experts from CreditorWatch have warned of the importance of the domestic construction industry to the Australian economy in the wake of covid, noted that employing 9% of all Australian workers the industry is behind only healthcare, retail and professional services in employment numbers, and accounts for 7.5% of the national gross domestic product.

As noted by CreditorWatch, construction has the worst late payment record of any industry, with more than 12% of construction businesses more than 60 days in arrears on payments to suppliers, which leaves a long chain of risk should construction businesses collapse.

The flow on impacts of issues within the construction industry therefore have the potential to reach broader corners of the economy. Further, CreditorWatch highlighted that smaller contractors, or those without strong balance sheets, are at a great risk of financial stress, with previously profitable companies already proven to report losses in the current environment, while commercial builders face increased difficulty in collecting receivables compared to those in residential construction.

Inflation hits grocery shelves, majors retain momentum

Data from the fast-moving consumer goods sector in the third quarter has demonstrated the impact to date of the inflationary environment, and experts warn a further step up should be expected. In good news for Australian grocers, Jarden analysts noted grocers have typically outperformed the ASX during periods of upper quartile inflation, as the broker anticipates prices to increase 12.1% year-on-year in 2022.

Driving the expected pricing increase is commentary from suppliers that a second price increase is likely to be accepted by grocers this year, with fewer retailers negotiating for better terms than in January and 12% of suppliers saying all price increases are being accepted compared to 4% just four months ago.

66% of suppliers have already reported negotiating price increases, while a further 20% are reportedly in negotiations. With an average increase of 8.6%, price increases have been larger than anticipated by Jarden. Notably, the broker does expect retailers will benefit from margin expansion thanks to price creep and reduced promotions.

In the quarter, grocery retailer Woolworths Group ((WOW)) reported 2.7% inflation and Coles Group ((COL)) reported 3.3% inflation. Following the third quarter, experts from Jarden also noted that while Woolworths looks set to report the top year-on-year sales growth in the grocer segment, the majors more widely have gained momentum with Coles Group and Aldi rounding out the top three.

Notably, while the market has been less optimistic on Metcash ((MTS)) it remains Jarden’s preferred sector pick, followed by Woolworths and then Coles.

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