Roger Mont­gomery

Fall­ing house prices and tighter lend­ing take their toll

Money Magazine Australia - - CONTENTS - Roger Mont­gomery is founder and CIO at the Mont­gomery Fund. For his book, Value.Able, see roger­mont­gomery.com.

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.

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