In Brief: Global Housing Declines, Hurricane Costs, Steel & Insurance

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Weekly broker wrap: weak outlook on housing markets, costs of climate change, steel production declines, insurers lose market share

-Oxford Economics predicts housing markets could decline as much as -20% amid rising rates
-More frequent and intense climate change-driven weather events take a costly toll on vulnerable communities
-Global steel production declines, but China economic trough could offer upside
-General insurers have lost market share amid increasing competition

By Danielle Austin

Ongoing rate rises threaten housing markets

Describing the current housing market outlook as the “most worrying” since 2007-2008, analysts from Oxford Economics are concerned for potentially steep housing market downturns ahead. The rising rate cycle, high property valuations and real income tightness are placing pressure on housing markets in advanced economies, and the analysts expect it is not a question of if a downturn is ahead, but how steep that downturn will be. 

House prices have now started falling in the US with mortgage rates rising to almost 7% from around 3% in less than a year, while steeper house price declines have already been reported in markets including Canada and New Zealand. Mortgage approvals and applications have also dropped rapidly in some markets, another indicator Oxford analysts find worrying for the market outlook.

Australia, alongside Canada, New Zealand and the Netherlands, are the markets most at risk according to Oxford, given large price increases in recent years and current elevated valuations and debt levels. Canada has suffered around a -7% price decline between February and August, while in New Zealand some data suggest prices have fallen between -5-6% in the three months to August. 

According to Oxford Economics, housing markest are at risk of either modest or much steeper declines of up to -20%. Unemployment could be a key factor that determines the depth of the decline, with a sharp rise in unemployment presenting greater risk to housing markets.

Costly climate change weather events widen economic gap

Amid experts anticipating climate change is increasing the frequency and intensity of storms and weather events, Hurricane Ian is already estimated to be one of the top ten costliest hurricanes to hit the US, causing considerable damage in Florida, Morgan Stanley has highlighted that initial cost estimates are in the range of US$40-70bn, but complete costs of weather events often emerge years after the event. 

While similar natural disasters have been shown to have only temporary effects on gross domestic product rather than lasting economic impacts, they do often increase economic inequality. Infrastructure less able to withstand weather events typically leaves low-income and minority communities more exposed to the economic impacts of climate change-driven events. 

In this instance, it is expected that flood insurance coverage in Florida is low, and that government subsidies will not completely offset losses. As Morgan Stanley highlights, it is not only damage to infrastructure that contributes to the cost of a weather event, but the ongoing impacts on employment, retail  and vehicle sales, and housing activity. 

Steel production weakens globally, upside could be ahead

World steel production further weakened in August, down -3% on the previous comparable period and -5.1% year-to-date. Steel spreads for the first half have averaged US$327 per tonne for East Asia supply and around US$400 per tonne for US supply. 

While steel demand from China over August remained in line with lows reported in the 2008 financial crisis, both Citi and Jarden believe economic activity in the nation could be approaching its trough. Citi finds steel production rates from China to be too high given weak demand. Jarden sees potential for China’s zero covid policy to be phased out from mid-October, and alongside a gradual lift in construction activity could see a recovery of China’s economic activity.

Near-term, Jarden expects a weaker Australian dollar to support first half earnings for both BlueScope Steel ((BSL)) and Sims ((SGM)). The broker remains confident in BlueScope’s ability to reach the upper end of its first half earnings guidance, but sees near-term risk in Sims’ earnings on read-throughs from US peers. 

Competition increases for general insurers as newcomers list on placement platforms

Increasing competition in the Australian Business Package insurance market could see listed general insurers lose market share according to Macquarie. With more insurers launching on broker placement platforms, the market share held by listed insurers has declined to 51% in FY22 from 69% in FY17.

Macquarie estimates Business Packages account for 4.0% of Insurance Australia Group’s ((IAG)) gross written premium, 4.3% of Suncorp Group’s ((SUN)) and 2.2% of QBE Insurance Group’s ((QBE)). The broker expects insurers will take market share losses not only in Business Packages, but also the Home and Motor insurance segments.

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