Roger Montgomery

Falling house prices and tighter lending take their toll

While we visited retail stocks a few months ago, so much has happened that it would be remiss not to provide a timely update in the form of a brief examination of the $7 billion furniture retail business.

Most importantly, the housing sector and credit growth are trending the wrong way. Falling house prices have a negative impact on households’ perception of their own wealth. Record leverage also has a negative impact on the capacity to spend more, and slowing housing activity has a negative impact on the incomes earned by tradies and contractors.

In the background is the Australia and New Zealand data released by South African-listed Steinhoff, which owns Freedom Furniture, Snooze and Plush furniture stores in Australia. Excluding the more recently acquired Fantastic Furniture, same-store sales growth was -6% in the six months to March. In the March quarter it is estimated sales fell by just over 9%.

The value of all home loans (excluding refinancing) fell by 1.2% in June compared with the previous month and by 8.4% compared with the previous year. It was the largest fall since April 2016. Loans to investors falling 18.1% year on year.

Housing “activity” (sales) is also decreasing with new and established home sales falling to almost the lowest level in the past two decades.

Interestingly, the tightening of credit conditions and falling home prices and sales are only now beginning to impact loan demand for renovations and additions. Owner-occupier loans for alterations and additions collapsed by about 20%.

According to APRA data, major banks wrote over $32 billion of interest-only loans in the quarter to March 2017. In the quarter ending March 2018, the same banks wrote just $13.6 billion in interest-only loans. The corresponding numbers for investment loans were $31 billion and $26 billion respectively.

This data indicates that the renovation cycle can reasonably be expected to turn down now. Credit tightening will continue to reduce demand for (and supply of) loans and falling house prices will reduce the incentive for investors to renovate and “flip” properties and for owner-occupiers to “do up” properties.