Weekly Reports | Apr 28 2023
This story features WESFARMERS LIMITED, and other companies.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
Positive fundamentals for house prices, headwinds for residential construction, problems for the China rebound & expectations for Asian exports.
-Weakness has passed for Australian capital city house prices
-Demand and labour issues for residential construction
-Is the rebound for the Chinese economy faltering?
-A false dawn for Asian goods trade
By Mark Woodruff
Australian capital city house prices to fall by less than expected
After property investors have endured a decline in Australian capital city house prices of around -9% during the last 12 months, economists at ANZ Bank believe most of the weakness has passed.
House prices are now expected to end this year unchanged before a modest rise in 2024.
Over recent months, low levels of supply and stronger than expected demand look to have trumped the impact of higher mortgage rates, suggests ANZ.
Previously, the economists had forecast a decline of around -10% for capital city house prices in 2023, before being surprised by improved auction clearance rates, very strong population growth and a recent lift in prices.
This shallower than previously expected decline in housing prices, suggests to ANZ any recovery will be slow and modest.
Auction clearance percentage rates in the mid-60% range reflect tight demand/supply fundamentals and are more consistent with annual housing price gains of 10%.
By way of background, ANZ explains the pandemic had already driven housing demand sharply higher with the average number of people per household falling to a record low.
Since then, immigration has been surging after the reopening of international borders at a time when total listings are at their lowest since 2010, running at around -20% below the five-year average.
Moreover, intense competition between banks has resulted in average mortgage rates on new loans rising nearly -50bps less than the cash rate.
ANZ Bank also thinks the RBA’s move to pause the rate hike cycle has boosted the housing market, as evidenced by the latest Melbourne Institute Consumer Confidence survey showing a strong lift in house price expectations.
Demand and labour issues for residential construction
The biggest issue for residential construction from the end of 2023 is a lack of new demand, which is a clear risk for suppliers, builders and developers.
Affordability is having the largest impact on demand, explains Jarden, given a 30% increase in costs and a -30% fall in borrowing capacity.
New residential demand is very soft with detached sales down -60% since June last year, notes the broker, and, according to Housing Industry Association (HIA) data, cancelation rates are now more than 30%.
Moreover, multi-residential building also remains weak with only large scale or ultra-luxury projects getting off the ground.
While Jarden expects major downward pressure on supplier material costs for residential construction over the next six months as a result of normalising supply chains, labour availability, cost and productivity now also present a significant issue.
On the one hand the normalisation of supply chains is a positive, but on the other hand downward pressure on prices is likely to put pressure on building material supplier margins at a time of elevated costs.
There has been no noticeable improvement in labour availability from a rebound in immigration, and the broker doesn’t anticipate labour shortages will ease in the near term given the pipeline of work.
However, the analysts suggest the pipeline of work will drop sharply from the end of 2023, with materials demand weakening after record highs in February and March.
Overall labour costs have increased by 9-10% across the sector, according to Jarden, and the tight market is putting upward pressure on tier 1 (union) wages as new enterprise bargaining agreements are agreed.
In a negative for both Wesfarmers ((WES)) and Metcash ((MTS)), a moderation in retail DIY and renovation/restoration spending (now falling year-on-year) suggests to Jarden some downside risk to hardware sales.
Is the rebound for the Chinese economy faltering?
Support for global growth might be limited in the second half of 2023, suggests Brandywine Global. It’s thought initial market euphoria after the China reopening has given way to an uneven and restrained rebound.
Financial markets seem to agree, as Chinese onshore bonds, the yuan and Chinese equities have largely retraced their gains since the beginning of the year.
Moreover, there may be less demand for commodities compared to previous cycles, as consumption is driving the recovery rather than industrial production, property or manufacturing investments, explains Brandywine.
A weak manufacturing PMI, when considered alongside weaker demand from developed countries on the verge of recessions, also suggests to Brandywine potential weakness for Chinese exports.
It’s felt an external sign of the sustainability of the economic recovery will be evidence of strong export demand.
Unfortunately, even post-reopening consumer spending (while strong) is much less than experienced in the West, due to the impact of lockdowns, a weak jobs market and lower income growth, explains Brandywine.
A lack of stimulus for households is another reason for comparatively less consumer spending than the West. Brandywine notes the Chinese government appears to prefer an organic growth rebound to prevent a similar inflation problem seen mostly in developed market countries.
The inconsistent and restrained rebound for the economy is due to structural growth and policy constraints including the need to defuse financial risks in the property sector and local government financing vehicles sector.
These local governments are considered more susceptible to debt-refinancing pressure due to weak fiscal revenue and higher borrowing costs.
Other constraints listed by Brandywine include addressing changing demographics, ensuring national security in a time of geopolitical tension and developing technology self-sufficiency.
On that latter point, the semiconductor chip export ban from the US, along with the Netherlands and Japan, is expected to restrain China’s growth even further.
China’s uneven economic recovery has also impacted on the expected strong return of Chinese tourism to destination countries, especially in Asia, which Brandywine Global points out is yet to play out fully.
A false dawn for Asian goods trade
Oxford Economics remain cautious about the outlook for Asian goods trade as monetary tightening in the key export markets of the US and EU will likely weigh on external demand.
Recent tailwinds from China's reopening and a likely increase in US import volumes (for the first time in three quarters) are likely to soon fade, according to Oxford.
Up to now, weakness in US imports has been largely confined to consumer goods.
This weakness is expected to become broader based (Oxford forecasts a mild US recession) due to softening nominal income growth, lower savings buffers, higher interest rates and tighter credit conditions.
The recent March quarter for Asian goods trade was better, but Oxford explains it followed a dismal prior quarter and the improvement was narrowly based, almost exclusively in China.
This Chinese trade strength is expected to wither relatively quickly, suggests Oxford. Indeed, most Asian goods exports are expected to trend lower in the second and third quarters of 2023.
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