In Brief: Housing, Mortgages, Travel & Telecoms 

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Housing construction dichotomy; travel industry demand, bank competition & potential downside for telecom retailers.

-Strong non-residential versus weak residential construction
-Airfares, and spending across the travel industry 
-Will increasing bank competition impact mortgage rates?
-Potential NBN change disadvantages retail service providers 

By Mark Woodruff

Strong non-residential versus weak residential construction

The current robust demand for non-residential construction derives from a diverse range of sectors, notes Jarden, with recent approvals data suggestive of further strength. 

In stark contrast, residential construction faces a deteriorating outlook, with a slowdown in activity widely expected to gather pace in 2024.

June quarter residential starts fell by -12% quarter-on-quarter to an annualised pace of 163,000, the lowest since 2013, point out the analysts. Houses and multi-unit dwellings fell by -7% and -20%, respectively.

While housing starts were in line with Jarden’s forecasts, they imply an around -15-20% shortfall compared to the Australian government’s aspirational target of building 1.2m homes over five years.

Labour supply will be the greatest capacity constraint to meeting this target, according to the broker’s industry feedback 

Jarden still expects a material slowdown in housing starts to 154,000 in FY24, a figure supported by leading indicators and the record rate of construction insolvencies. Increases are expected in FY25 and FY27 to 166,000 and 230,000, respectively.

In the near-term, Jarden sees downside risk for both residential developers and building materials companies though a large long-term pipeline of growth is anticipated from FY25.

The total pipeline for construction work is around $260bn, with the $76bn residential share the equal lowest recorded since 2015.

The balance of $182bn for non-residential construction is comprised of $80bn of public spending, $46bn of private building, along with mining/energy work and other private engineering of $32bn and $24bn, respectively.

Unfortunately, this strength for non-residential construction has its downside, as new dwelling costs may not moderate as much as expected during a significant downturn. 

More positively, Jarden anticipates strength in non-residential construction will provide a buffer against potential employment/growth impacts from the looming residential construction slowdown.

Airfares and spending across the travel industry 

As was the case during September in Australia, domestic airfares are proving resilient in October, while international fares are falling materially as capacity is reinstated, explains UBS.

Compared to a year ago, fuel prices have fallen by -14%. The current price of around $174/bbl is -6% down on last month, reflecting falls for Brent crude, the refining margin and the Australian dollar of -7%, -15% and 2%, respectively.

Nonetheless, Macquarie notes recent quarterly profit reporting by Delta Air Lines in the US revealed the jet fuel price had risen by 32% since May. Management suggested fuel inflation can be recaptured, albeit over multiple quarters as fuel and broader inflationary pressures will force the industry to recalibrate pricing.

For Buy-rated Qantas Airways ((QAN)), UBS points out fares are tracking better than forecast for FY24. It’s thought the return of domestic capacity may be a strategy by the airline heading into summer to sustain loads, yields and margins.

This broker has a Sell rating for Air New Zealand ((AIZ)), which continues to recognise fare growth on capacity levels that have broadly recovered.

International fares are also moderating in New Zealand as industry capacity reinstates, observe the analysts, with the industry expected to attain more than 90% of pre-covid levels within the next six months.

Ranging across the A&NZ aviation and travel industries, UBS also has Buy ratings for Corporate Travel Management ((CTD)) and Webjet ((WEB)) and a Neutral recommendation for Flight Centre Travel ((FLT)), while Auckland International Airport ((AIA)) is assigned a Sell rating.

Exacerbated by macroeconomic concerns, Macquarie is receiving mixed signals across type of travel (corporate versus leisure), geographies and operators.

The ‘premium’ consumer in the US continues to outperform, if Delta’s results are anything to go by, notes Macquarie. Business travel is steadily improving, as corporates continue with return-to-office initiatives, and a recent Delta corporate survey found the majority of companies expect their travel to "stay the same or increase".

While expectations in the US were high, based on greater capacity and lower airfares, some low-cost carriers recently noted domestic slightly disappointed, yet international remains strong, points out the broker.

Back in Australia, Macquarie’s proprietary data, which provides a sample of consumer spending habits on a weekly basis, show travel spend tracking in line with 2019 and 2022, while spending on travel agents is stronger. 

The average basket size across airlines and travel agents as well as hotels and motels remains fairly resilient compared to 2019, observes the analyst.

Macquarie has an Outperform rating for both Webjet and Flight Centre Travel, and is Neutral-rated on Corporate Travel Management.

All three stocks are trading down -13-16% over past two months compared to the -6% fall for the Small Ordinaries Index, which Jarden attributes to profit taking, concerns over the macroeconomic outlook and weaker consumer spending. 

Will increasing bank competition impact mortgage rates?

As mortgage competition has stabilised over the last month, there has been no material changes to mortgage rates, though Jarden explores whether negative book growth for CommBank ((CBA)) is a potential trigger for a renewal of hostilities among banks.

Average interest rates have continued to fall, notes the broker, with the front-book discount falling to -29bps from a peak of -50bps, the lowest since at least 2019.

Front book is the term lenders use when referring to home loan customers a bank has recently acquired, while back book refers to previously acquired customers.

So, is this modest reduction in mortgage competition and improvement in returns threatened by CommBank’s lower housing lending growth?

Probably, suggests Jarden, given the other three major banks are seeking to remain at around industry growth rates, and CommBank will only tolerate negative growth for so long.

Mind you, the broker believes July/August credit growth numbers (which reflect June applications) likely overstated the weakness for CommBank, and flows for September and October should see some normalisation.

Supporting Jarden’s view, the September Broker Pulse survey (run by Agile Market Intelligence) showed a 76% increase in the bank’s turnaround times to 5.8 days, potentially signifying a rebound in application volumes. 

Additionally, the share of brokers using CommBank stabilised in October, while most peers saw material declines for the month. In the past, the analysts have noted a reasonable correlation between relative broker usage and relative credit growth.

Jarden is far from surprised its proprietary Competition Tracker shows brokers’ experience with Bank of Queensland ((BOQ)) has fallen sharply to an around two-year low in September, mainly driven by weakness from ME Bank.

The broker attributes this outcome to numerous internal changes and likely disruptions from the bank’s multi-year cost out/digitalisation program. 

Overall, the analysts continue to expect minimal first half volume growth for Bank of Queensland, partly because management continues to prioritise returns over volume growth.

Potential NBN change disadvantages retail service providers 

A proposed change to a key undertaking by NBN Co to the Australian Competition and Consumer Commission would be negative in the medium-to long-term for the likes of Telstra ((TLS)), TPG Telecom ((TPG)) and Aussie Broadband ((ABB)), suggests Macquarie.

The Special Access Undertaking (SAU) is a major part of the regulatory framework that governs the prices and non-price terms on which the NBN supplies wholesale services to retail service providers (RSP) such as retail phone and internet companies.

While consumers will benefit, Macquarie believes RSPs will suffer due to increased competition and less differentiation between retailers.

Formerly, apart from customer service, RSP’s could be differentiated by network performance, achieved through higher capacity/connectivity virtual circuit (CVC).

Now, the removal of CVC is likely from December 2023 onwards for NBN 100 plans. Flat rate pricing will also be in place from 2026 onwards for lower tiers. 

RSPs with a large portion of NBN 12 and NBN 50 plans are likely to see the largest changes to their wholesale access costs, believes the broker.

The access virtual circuit (AVC) monthly price of NBN 50 is set to increase to $50 from $45 from December onwards.

A weighted average price control (WAPC) instead of a revenue cap will apply, with the WAPC capped at CPI until NBN reaches cost recovery by around FY30.

Macquarie has an Outperform rating on Telstra given upside to forecasts in from FY26 should the company execute on a price increase. Upcoming potential catalysts include the November Telstra Investor Day.

The broker has no rating for TPG Telecom due to a current research restriction, while Aussie Broadband is not covered.

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