In Brief: Housing, Migration & Non-Bank Lenders

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This story features PEPPER MONEY LIMITED, and other companies.
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Weekly broker wrap: higher rates, steeper falls for Aussie properties, with migration offering partial offset, while non-bank lenders cannot compete directly with banks and health insurers look okay in February, but what comes next?

-More RBA rate hikes translate into a deeper downturn for Aussie housing
-More migration to support Australia's economy
-Non-bank lenders at funding disadvantage in competition with banks
-Affordability issues await health insurers in second half 

By Danielle Austin

A deeper downturn for Australian housing

The surprise message from the RBA that more rate hikes will be needed to keep the local inflation genie bottled up has triggered forecasts for even steeper falls in housing prices across Australia.

Analysts at Jarden now anticipate prices will take a peak-to-trough tumble of -20-25%, previously expected to be -15-20%, ahead of a 10% recovery in 2024. On Jarden's projection, the RBA cash rate will reach 4.1% by May, rather than the previously assumed 3.6%, pushing the average mortgage rate in excess of 6.0%.

Morgan Stanley shares the sentiment, expecting further 25 point hikes in March, April and May to drive the cash rate to 4.1%. This broker forecasts the average outstanding variable rate mortgage will reach 7.0%, with fixed rate mortgages experiencing delayed impact. 

Jarden points out a -20-25% fall in house pricing would be the largest correction on record, driving a return of national house prices to 2020 levels and largely erasing the gains made during the post-covid price boom. 

Morgan Stanley expects the additional rate rises to drive servicing costs up 70 basis points to a record high, equating to an 8.0% income headwind for the average household. This broker also expects borrowing capacity will take a further -3% decline, for a total decline of  -33%.

In contrast, Jarden expects APRA will lower the serviceability buffer to 2%, in a bid to stop a deeper decline in house prices. It sees this as likely occurring by September, and in isolation having the ability to increase borrowing capacity by 10%. 

Migration smooths, but doesn't salvage

With migration to Australia recovering strongly over 2022, Morgan Stanley expects this trend will continue through 2023 with net migration to recover to record highs. Typically a key economic growth driver for Australia, the broker expects migration to prove important in offsetting an expected housing and rates-driven recession. 

Increased migration should not only boost economic growth, with Morgan Stanley anticipating Australia’s economic growth can outpace that of other similar economies, but also underpin increased labour supply.

The broker expects the rise in unemployment will outpace the Reserve Bank’s expectations, and assist in containing wage growth. Morgan Stanley also warns a migration lift will likely see rental markets remain tight, but likely won’t be sufficient to prevent further house price declines. 

Too early to jump on non-bank lenders 

ASX-listed shares of non-bank financial institutions look cheaply priced, but analysts at Citi don't think they represent buying opportunities just yet. 

Citi finds non-bank financials remain at a distinct funding disadvantage to the banks, given they are unable to accept deposits and therefore cannot offer the cheapest form of funding when extending finance. This means non-banks are unable to compete in commoditised and simple banking products. No surprise thus, these companies have increasingly moved into the prime mortgages space which now comprises 40-90% of the mortgage books of non-bank financials in Australia.

The broker highlights the difference between the cost of funding available to banks and non-bank financial institutions has widened against the current macro backdrop, with non-bank financials unable to keep up with the competitive pricing offered by banks. 

Citi does point out the banking sector will need to repay the $200bn Term Funding Facility to the Reserve Bank over 2023 and 2024, which should go some way in closing the gap in funding costs, thus improving competitive dynamics. 

Preferring a cautious approach, Citi suspects industry dynamics might improve later in 2023, at which point it might be better timing to cast an eye over this sector. Citi initiated coverage last week with a Neutral view on Pepper Money ((PPM)) and a Sell rating for Resimac Group ((RMC)).

Health insurers facing affordability headwinds

Government approved average annual private health insurance rate rises of 2.9% have come in slightly below Jarden’s expected 3.0%. Premium rate rises apply from April 1, but some insurers are expected to defer rises until later in the year. 

While all of the top five private health insurers approved rate rises above the industry average, for the second consecutive year HBF saw the highest rate rise at 4.49%, followed by Bupa at 3.39%, HCF at 3.33%, Medibank Private ((MPL)) at 2.96% and nib Holdings ((NHF)) at 2.72%.

The broker points out Medibank’s 2.96% increase is largely in line with its expectations, meaning the key risk for the insurer remains its ability to retain policyholders following the widely publicised cyber attack in October. With more detail expected to be shared with the company’s first half results, due late February, Jarden points out web traffic indicators have suggested customer churn may be less than initially feared. Jarden has left its forecasts unchanged ahead of the first half result release.

Elsewhere, nib Holdings’ increase of 2.72% was lower than Jarden’s expected 3.1%, but the broker does anticipate nib will benefit from lower downgrading and higher volumes. Accordingly, Jarden updates its earnings per share forecasts for the insurer by just -0.4% and -1.2% for FY23 and FY24. 

With claims appearing relatively subdued in the first half of the fiscal year, Jarden is expecting private health insurers to report solid first half results, but that affordability pressures will mount over 2023 and impact on second half results.

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