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House prices: past the peak? - Australia



Are falling house prices in Sydney the canary in the coal mine? It’s time to review your portfolio’s exposure to the housing market.

House prices: past the peak?

Something’s changed in the Sydney housing market. Or at least it has where I live, in the inner suburbs. In my suburb two houses are for sale for prices below what they sold for last year. It’s an unusual occurrence.

Goodness knows why the vendors are selling after only a year. Haven’t they heard that property – like shares – is a long-term investment? When stamp duty is taken into account, one of the vendors is set to dust at least a quarter of a million bucks – in just one year.

Of course, the plural of anecdote is not data. The Sydney housing market has given the impression it was weakening before, only to take off again.

Don’t dream, it’s over

But there’s enough anecdotal evidence to suggest the Sydney house price boom is over – or at least very long in the tooth. Perhaps nudged by APRA’s tightening of restrictions on interest-only mortgages – which are now around 0.5% more expensive than principal and interest loans – buyers seem to have lost their enthusiasm.

We’re not in the business of making house price predictions. We leave that to others. We also suggest you completely ignore predictions and concentrate on preparation instead.

What’s hard to ignore though is how important the housing market is to the economy. Falling house prices – if they become widespread – are likely to be associated with a range of unpleasant effects.

You need to make sure your share portfolio is prepared. Hopefully it already is. We’ve long recommended that banks make up no more than 20% of your portfolio and there’s an argument for much less. If you’re conservative, we’ve suggested 10%.

In past downturns, such as the global financial crisis in 2008 and 2009, it was commercial loans that went sour. This time it could be housing loans. Only a relatively small proportion of housing loan customers need to default for bad debts to cause problems for banks.

Double – or nothing?

Plenty of other sectors would be affected. Building materials is one – companies like CSR (ASX: CSR) look particularly exposed. CSR has benefited enormously from the building boom – its operating margin has almost doubled since 2014.

Housing construction peaked last year in fact. Weakening residential property prices will discourage developers – another sharemarket sector to be ware of – from commencing new projects. But it will take some time for the pipeline of projects to complete. If it’s a train-wreck, it will happen in slow motion.

Remember that the market already expects a slowdown in housing construction. A mild downturn is ‘factored in’, as they say. The issue will be whether it turns out worse than the market expects.

Already buffeted by international competition and the threat from Amazon’s Australian entry, retail is another sector to be wary of. After expecting Myer’s (ASX: MYR) new strategy to support sales, we bailed out when that didn’t happen. If Myer didn’t benefit from the eastern states housing boom, then it could get very ugly when house prices go into reverse.

The reality is that most sectors will be affected if house prices slump. Even companies that might seem immune, like gambling giant Crown Resorts (ASX: CWN), have a discretionary element to their revenues. Lower disposable incomes will mean less money spent on entertainment in general.

The odd couple

Surprisingly, some companies may actually benefit. In REA Group welcomes the slowdown, we highlighted how booming prices have been bad news for property listings company REA Group (ASX: REA). We’re currently reviewing Fairfax Media’s (ASX: FXJ) property listings spin-off Domain to see if it might present an opportunity when it lists on the ASX next month.

The reality, though, is that very few portfolios will be unscathed if house prices or construction turn down sharply.

So my message is: if you’re going to panic, panic early. Once the headlines scream about banks repossessing houses, it will be too late. The time to think about how lower house prices might affect the stocks you own is now. Review each of your holdings to determine how it might be affected.

After such a long boom, my best guess (as distinct from a prediction) is that average house prices flat-line or fall slightly for a number of years. Perth provides some guidance here – the median house price in Australia’s westernmost capital city has fallen 8% since the 2013 peak. If that turns out to be the worst of it, then we should count ourselves lucky.

If you own a company you’re worried might be hit by a house price downturn, ask me about it in the comments below. I’ll do my best to provide an opinion.

Note: The Intelligent Investor Growth and Equity Income portfolios own shares in IOOF Holdings. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in Crown Resorts and Fairfax Media.

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