In Brief: Housing, Banks, Regulatory Easing, Consumer Sentiment and Spending, Construction

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Weekly broker wrap: house prices decline, banking sector to follow, regulatory easing on the table, consumer sentiment remains low, discretionary spending to be impacted, public construction to support construction recovery.

-Cash rate rises expected to drive -15% house pricing decline
-House price correlated declines expected in the banking sector near-term
-Regulatory easing could be implemented by mid-2023 to address soft housing outlook
-Low consumer sentiment likely to impact on discretionary spending
-US read-throughs suggest retailers will look to write downs and clearance events to move stock
-Investment in public infrastructure to support elevated construction costs

By Danielle Austin

Anticipated rate hikes drive house price decline

Rising inflation and interest rates continue to be the headline story in economics, and economists from ANZ Bank are now forecasting the Reserve Bank will increase its cash rate to 2.6% by early 2023, and that the steeper than expected rate increase will speed up a decline in house pricing.

ANZ is anticipating house prices to decline -5% in 2022, and a further -10% in 2023, given the current economic environment, highlighting this scenario would leave house prices 6% higher than pre-pandemic levels.

The economists noted that given the average borrower has a large savings buffer, reduced borrowing capacity, rather than forced selling, is likely to be the driver of house price declines. ANZ anticipates large savings buffers, strong household income growth, and increasing population growth can all buffer falling house prices.

Investors should be aware that house prices in Sydney and Canberra will experience the largest decline in the coming year, and while these markets, as well as Melbourne, have already experienced some decline in house pricing other capitals may not see prices fall until later in the year.

Market sentiment on banking sector to remain negative in the near-term

Anticipating rising rates and margins will be supportive of banking sector earnings growth, Jarden has lifted its earnings predictions for the banking sector 2% in FY23, but decreased predictions -2% in FY24, and notes it expects market sentiment relating to the sector will remain negative until early 2023 given correlation to house price declines.

The Jarden analysts note potential further downside risks to their outlook for the sector if rates rise higher than anticipated, or if regulatory easing is not implemented in the coming year.

National Bank ((NAB)) remains the broker’s top pick in the sector, likely to benefit from a largely solid business credit outlook, while it is Neutral rated on Commonwealth Bank ((CBA)). The broker is Underweight rated on both ANZ Bank ((ANZ)) and Westpac Bank ((WBC)), with Westpac Bank is its least preferred pick.

Dragging housing outlook could see regulatory easing in 2023

While analysts at Jarden don’t doubt further cash rate hikes are ahead, they anticipate regulatory easing will be introduced from mid-2023 as a softer housing outlook drags into the coming year. The broker is anticipating material falls in home loans, credit growth, prices and building approvals given likely further hikes to the cash rate, but expects the Reserve Bank will issue rate cuts in the second half of 2023.

Alongside easing from the Australian Prudential Regulation Authority (APRA), which the broker expects will reduce its serviceability buffer to 2.5% or less, Jarden anticipates easing from the Reserve Bank will see loan flow improve modestly in 2023.

These analysts highlights the macroeconomic environment is likely to drive a material fall in building approvals. Jarden forecasts approvals to drop to around 130,000 in the current year, but to rebound to around 180,000 in 2023.

The decline in approvals adds downside risk to housing-exposed stocks, including banks, discretionary retailers (within Jarden’s coverage this includes Wesfarmers ((WES)), Harvey Norman Holdings ((HVN)), JB Hi-Fi ((JBH)), and Super Retail Group ((SUL))), residential REITS, building materials and platforms (including REA Group ((REA)), Domain Holdings Australia ((DHG)) and PEXA Group ((PXA))), and forecast downgrades across Jarden’s coverage reflect this risk.

Consumer sentiment low amid challenging economic outlook

Analysts from Barrenjoey have described the current consumer macroeconomic outlook as the most challenging time in more than fifteen years, with consumer confidence taking a hit as a result. The broker is anticipating FY23 will be as challenging, if not more, than FY19, as cost of living pressures impact on retailers’ margins.

Data collected by Barrenjoey suggests the cost of living is set to rise 13% in FY23, and with the increase in household savings reported in recent years skewed to high income households the broker notes middle- and lower-income households will feel the impact.

Barrenjoey expects discretionary retail will slow, and highlights the electrical and furniture sectors as likely to experience the most notable slowing given spending is most above trend for these retailers. While supermarkets are the brokers preferred exposure, it highlighted youth apparel names as its preferred exposure in emerging companies, including Lovisa Holdings ((LOV)) and Universal Store ((UNI)), but also sees favourable risk-reward in Adairs ((ADH)) and Dusk Group ((DSK)), and considers JB Hi-Fi ((JBH)) and Kogan ((KGN) to have the greatest earnings risk.

Retailers to look to write downs as consumer spending slows

Predictions of impacts of the inflationary environment on discretionary retailers continue, with analysts from Macquarie anticipating a drag on discretionary spending. Looking to the US for a read-through on how consumer spending trends will emerge domestically, the broker is predicting the US will suffer a recession, while Australia will face only an economic slowdown.

The Macquarie analysts noted inventory write-downs and clearance activities are already being employed by US retailers to move excess stock, and highlights current low unemployment, low interest rates and high cash balances may see a recession play out differently to the economic downturn in 2009. The broker anticipates a satisfied consumer with concerns over the rising cost of living could lead to greater earnings margin pressure on discretionary retailers than in previous economic downturns.

Macquarie analysts predict Australian inflation will reach 7%, but notes if wage inflation can stay ahead of the Consumer Price Index household spending could remain robust. The broker reiterated a preference for consumer staple retailers over discretionary retailers, and within its coverage notes a preference for Coles Group ((COL)), Metcash ((MTS)) and Endeavour Group ((EDV)) over Woolworths Group ((WOW)). Of the discretionary retailers in its coverage the broker prefers Harvey Norman Holdings ((HVN)) to Wesfarmers ((WES)) and JB Hi-Fi ((JBH)).

Public infrastructure supports continuing elevated construction costs

Construction costs look to remain high despite a likely slowdown in residential construction activity according to Oxford Economics, with new investment in publicly funded infrastructure projects coinciding with ongoing supply chain constraints impacting on delivery of materials and a tight labour market supporting elevated costs.

Supply chain disruptions have increasingly intensified in 2022, compounded by lockdowns in Shanghai and the Russia-Ukraine conflict. With a supply and demand imbalance driving elevated construction costs during the covid pandemic, significant global investment in publicly funded infrastructure should support the ongoing rebound of the construction industry even as residential construction slows, according the economists from Oxford.

Among commitments to infrastructure is a US$500bn spend on new highways, railways and bridge projects in the US over the next decade, the European Union’s Next Generation fund, and China’s impending infrastructure boom.

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