RBA rate cut to spark record housing boom

05 February 2015

The Australian Financial Review, 5 February 2015

By Michael Bleby

The biggest building boom in Australian history is going to accelerate, predicts BIS Shrapnel, which raised its forecast for housing and apartment commencements following the Reserve Bank’s interest rate cut.

The number of dwellings built this year could come close to 200,000 for the first time, the property forecaster said, beating the previous record of 187,000 in 1994, when the economy was recovering from a recession.

“We were saying something in the low-mid 190,000s,” BIS Shrapnel ­associate director Kim Hawtrey said. “Now we’d be saying something in the upper 190,000-level.”

This week’s interest rate cut and any further ones will stoke an already-booming housing industry. Last week ASX-listed developer Villa World raised its full-year profit forecast a second time, citing “strong market conditions and sales momentum”.

The ASX continued to gain on Wednesday from the rate cut, rising 1.2 per cent, following Tuesday’s 1.5 per cent lift. While all of the big four banks rose, Westpac was the biggest gainer, jumping 97¢, or nearly 2.8 per cent.

Commonwealth Bank of Australia matching the Reserve Bank’s reduction and Westpac giving customers a slightly bigger rate cut.

Commonwealth Bank of Australia was the first of the big four banks to pass on Tuesday’s interest rate cut to home loan customers, reducing its standard variable rate by 0.25 percentage points to 5.65 per cent. Westpac has cut its SVR by 0.28 percentage points to 5.7 per cent, its level lowest since 2009.

But there is little danger of activity rising to unsustainable levels, builders said.

“I really don’t see any overheating problems,” said Robert Lynch, the executive director of home builder Tamawood.

Dr Hawtrey said Australia’s shortage of houses meant it could absorb high levels of house construction for several years.

“We estimate [the shortage] is about 100,000 dwellings Australia-wide and about half of that would be in NSW – ­predominantly Sydney – about 30,000 in Queensland and 20,000 in WA,” he said.

“In Victoria the supply-demand situation is much more balanced. The other minor states – SA, Tasmania – are ­probably in oversupply but not to any ­worrying degree.”

The coming round of profit announcements is likely to reveal the boost the ­market is giving developers like Perth-based Cedar Woods.

“We expect Cedar Woods to reaffirm their guidance of at least $40.3 million for the full year and have a strong level of forward sales to support this position at the results,” Morgans analyst Scott Murdoch said on Wednesday.

The strong market is also boosting Simonds Group, Victoria’s largest home builder, which listed last year.

“There are very supportive conditions across the markets in which they operate,” Mr Murdoch said.

Morgans is house broker to both ­companies.

Other companies in the housing chain, such as Boral, James Hardie and Adelaide Brighton, will also benefit from lower rates, Deutsche Bank analyst Emily Smith said on Wednesday.

“Lower interest rates means demand will stay stronger for longer and should mean improved pricing power for the materials suppliers,” Ms Smith said.

“The building material suppliers’ ­ability to increase prices when demand is strong is much better. There is the ­potential for further earnings upside from price increases, given the strong housing demand.”

The greatest shift in the market is the relative growth of apartments and townhouses and this is going to ­benefit larger developers such as Mirvac and Lend Lease.

“We expect to see building approvals to remain at structurally higher levels given the preference for apartments resulting in lower household formation rates, lower for longer interest rates, continuing strong population growth and continued demand from offshore purchasers,” said John Richmond, real estate analyst at Credit Suisse.

Still, the current improvement was not likely to push into unsustainable levels of activity and would only help these ­companies make up ground lost in the wake of the global financial crisis, he said.

“We expect developer return on assets to return back to the long-run average to 12 to 15 per cent over the next 2 years, ­supporting annual earnings per share growth of 7.6 per cent for Stockland, 7.2 per cent for Mirvac and 7.6 per cent for Lend Lease.”

The biggest risks would come when they came to replenish their stocks of land at a time of greater competition.

“Right now things are looking good,” Mr Richmond said.

Tamawood’s Mr Lynch said the only housing market that could be at risk of overheating was NSW, but that was, ­ironically, being kept in check by infrastructure and planning hurdles. These would ensure a steady release of land, rather than a rush, he said.

“The only significant market that could overheat is NSW and it’s being curtailed by the length of time it’s taking to get land developed and registered,” he said. “It’s a cap on it becoming a boom.”

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