Weekly Reports | Nov 17 2023
House prices and affordability, preferred REITs during sector outperformance; commodity forecasts and stock preferences & record lows for superannuation fees.
-Rising incomes, not falling house prices, will ease affordability
-Preferred REITs during sector outperformance versus the ASX200
-Barrenjoeys commodity price forecasts and stock picks
-Superannuation fees fall to record lows
By Mark Woodruff
Rising incomes, not falling house prices, will ease affordability
Greater house price affordability in advanced economies will arise, believes Oxford Economics, not due to a further house price correction but as a result of a gradual rise in household incomes.
Its felt an end to rate rises, broader easing of credit standards and lower leverage should ensure this rise in income, assuming a benevolent outlook for labour markets.
Labour markets, rather than the financial sector, is where one should look for housing market risks this time around, suggests Oxford. Currently, only a gradual worsening in both unemployment and real incomes is expected.
House prices are in retreat in almost all major markets globally, though almost none of those markets have fully erased the gains since the post-pandemic recovery started, observes Oxford.
The pull-back is running out of steam, and some markets are even experiencing renewed price rises, most notably in the US and New Zealand.
The current lack of housing affordability is evident when looking at the commonly used ratios ofhousing price-to-rent and price-to-income. Both ratios are above their long-term trends in almost all advanced economies, where rents and house price growth have outpaced incomes, explains Oxford.
House prices and rents have risen as pandemic-era savings and fiscal support allowed consumption and prices to outpace (slower rising) income.
Outcomes in Australia, Canada and Scandinavian countries may well be different, suggests Oxford, as householdshavent reduced borrowings post-GFC.
Oxford Economics explains once indebtedness rises above sustainable affordability, a slowdown in the business cycle has the potential to cause forced sales and a consequent drop in house prices.
Preferred REITs during sector outperforms against the ASX200
Despite some conflicting global inflation data, Citi senses a pickup in investor interest to ascertain which individual Australian REITs may benefit most from potential REIT sector outperformance against the ASX200.
For the record, the broker forecasts the next potential rate rise is most likely next February, though action by the Reserve Bank in December is not out of the question.
Recent Citi analysis of past cycles in 2000 and 2010 focused on both the peak of interest rates and the commencement of interest rate cuts.
As rates peaked, the broker noted the REIT sector displayed a negative correlation to bond yields and interest rates, benefitingfrom both the plateau at the top of the interest rate cycle, as well as the commencement of interest rate declines.
According to historical regression analysis, Citi highlights outperformancefor REITs starts 0-4 months prior to the first RBA rate cut.
Top beneficiaries withinResidential REITs, according to the broker, will be both Stockland Group ((SGP)) and Mirvac Group ((MGR)), while defensive retail real estate REITs such as BWP Trust ((BWP)), Charter Hall Retail REIT ((CQR)) and Vicinity Centres ((VCX)) should benefit from lower interest rates for both the consumer and the real estate loans.
Industrial REITs should also benefit, including one of Citis top picksin Goodman Group ((GMG)), due to its best-in-class financial and operational position.
Value stocks such as GPT Group((GPT)) and Charter Hall Group ((CHC)) may also be supported, in Barrenjoeys view.
Barrenjoeys commodity price forecasts and stock picks
In a tough year for commodities so far, only iron ore and metallurgical coal prices have risen by 11% and 1%, while lithium, thermal coal and nickel have experienced falls of -74%, -41% and -38%, respectively.
Barrenjoey anticipates ongoing tightness in the near-term iron ore market and raises its 2024 price forecast by 5% to US$115/t and assumes the price remains above US$100/t through to 2026. The long-term price forecast is also raised to US$80/t from US$75/t.