Today’s Daily Reckoning Australia looks into the housing market, at least via the stock market.
It’s certainly not booming, but the outlook doesn’t appear as dire as some would have you believe. Arrears are low, for starters.
Then, we have the clearance rate pushing up too. This is a solid leading indicator.
The Australian Financial Review (AFR) cites property researcher Louis Christopher today as saying:
‘These type of clearance rates are not typical for a falling market, and the trend of rising clearance rates suggests there’s more strength in the market at this point in time compared to where we were as recently as December.’
Mr Christopher cautions that should the cash rate go to more than 4%, the housing market could be in further trouble.
That’s exactly what Westpac Chief Economist Bill Evans has just warned where he expects the cash rate to go by mid-year.
Just to confuse everyone (including me), the CEO of non-bank Resimac, Scott McWilliam, says that it’s not the nominal interest rate holding borrowers back, but rather the uncertainty around when interest rates will peak.
Also, from the AFR:
‘“There is very strong serviceability in the system,” Mr McWilliam said.’
Now, that’s interesting in the context of today’s debate.
The mortgage lenders are calling for the 3% serviceability buffers APRA imposed on the finance sector to be toned down a bit.
Their argument is that’s what was appropriate to protect against a sharp rise back to ‘normal’ levels or rates.
And we’ve had it now!
Now look at today’s scenario…
A loan might be available at 6%, but a borrower would need to prove an income of 9%.
Too bad for the mortgage lenders, anyway.
APRA this morning released a statement saying it still regards 3% appropriate, considering the macro risks around the globe and the potential for higher rates.
However, they concede that it might be appropriate to take its foot off the brake in the future.
Hmm. The outlook for property is better than it looked six months ago, but we’re not back to the heady days of 2021, that’s for sure.
And yet there are signs that real estate-related stocks are stabilising, at least for now.
Does another month or two bring in the value investors with an eye to the next leg up? Maybe.
The market looks ahead nine months or so.
So, by 2024, the pressure should be coming off their funding costs, housing credit is back to normal trend, and investors coming back into the market chasing the high rents on offer.
Now the fundies might nibble in a low-key way on this idea, but it is a longer-term play.
They do need a short-term alpha to keep their clients happy.
Put yourself in the shoes of a fund manager for a moment. Where do you find a quick alpha in today’s market?
You’re unlikely to get it in the consumer discretionary sector. The rise in rates will reduce buying power for much of middle Australia.
Perhaps the easiest answer is to go global.
One way to sidestep the issues pressing on Australia is to find companies that operate in multiple markets.
Any stock with a link to travel is worth investigating.
Graham Turner, of Flight Centre fame, made the point the other week that consumers are still spending big on travel.
People will give up a lot before they concede their annual holiday, I think it’s fair to say.
Plus, globally, we have the American consumer in good shape and the Chinese coming out of years of lockdown and restricted travel.
Where else might we look?
My colleague James Cooper is still pounding his drum for small resource stocks.
There’s been so little investment in future supply that the resource industry will take years to catch up.
Only last week he released his latest issue for subscribers to his service Diggers and Drillers.
It was a beauty!
I suggest you take a look at James’ work by clicking here.
Editor, The Daily Reckoning Australia