In a recently released research note, Citibank said that the Australian property market was “too hot”, and while flagging a market slowdown, noted that a property crash wouldn’t necessarily be a bad thing. The report argues that as average housing conditions return, listing volumes will be lifted.
“After three years of rapid property price growth . . . we now see the market at a turning point,” said Citibank analysts David Kaynes, Kofi Mensa, and Manisha Sandilaya. "As the market cools, properties will take longer to sell, leading to rising listing volumes even if the turnover rate for the market remains low."
They added: “Australia avoided a property downturn in the GFC; however, international experience (US, UK) suggests that turnover [of housing] would fall dramatically if house prices crash. . . . Given how low Australian turnover is already and the offsetting factor of rising listings/sale, we think that the downside risk is likely limited.”
A slowing market
Citibank noted that the volume of residential property listings had fallen in five of the past six years, while listings fell by 21 per cent from the 2011 to the 2017 financial year. The authors added that the construction boom in that same period had boosted overall housing stock by 10 per cent.
A decline in housing turnover was also observed, with Citibank contrasting the 4.7 per cent turnover rate in the 2017 financial year with the long-term average of 5.6 per cent. The bank noted that the “most likely catalyst” to trigger a return to the long-term average would be a “significant pullback” in investor activity.
According to Citibank, the market has experienced clearance rates of 71 per cent over the past three years. “While they have eased slightly from a recent peak, the 74 per cent clearance rate in the June quarter was well above the long-term average of 60 per cent.”
Good news for REA and Domain
For property portals such as REA (REA Group), FXJ (Fairfax Media Limited, and its property portal, Domain) and NWS (News), the “too hot” market has created a difficult situation, the authors commented, noting: “Contrary to popular belief, Australia’s rapidly rising house prices have been a significant headwind for the two portals that advertise properties for sale.”
They added: “As the property market cools down, we expect listings growth likely to pick up, driving earnings upgrades across all three companies.”
The longer listing periods will see the property portals receive greater advertising revenue, Citibank said, rationalising the upgrade in target prices (TP) for the three portals.
The portals will receive the following upgrades: $20.75 TP per share for NWS, $1.10 TP per share for FXJ and $80 TP per share for REA.