Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 377

The surprising resilience of residential housing and retail

We are in the midst of a one-in-100-year pandemic and unemployment has reached levels not seen since the Great Depression. And while market observers continue to either marvel or scratch their heads at the surge in global equity prices, some truly unexpected real estate metrics continue to emerge.

First, it was widely expected by many economists and observers that the local residential market was poised to crash by up to 30%. However, to date, the data is not playing out as expected.

A pandemic and one million people unemployed, so house prices are … going up?

While it’s early days, some of the best real-time data we have – in this instance, preliminary auction clearance rates – suggest house prices are not (yet) falling in a meaningful way. In fact, despite the naysayers, a strong case can be made that by the time we reach the fourth quarter this year, residential prices in some of our main cities will in fact be rising.

Source: Domain, CoreLogic, ANZ Research, Quay Global Investors

Of course, auction clearance rates are not a perfect measure. But nevertheless, over the long term there is a steady relationship between clearance rates and residential price movements. For instance, since the end of the lockdown in Sydney, clearance rates have generally oscillated around 60%, a situation suggesting a flat-to-rising market. CoreLogic reports that in the four weeks to 20 September across all capital cities, new listings increased and auction clearance rates were rising.

It appears to be happening elsewhere too

Australia is not alone in these unexpected metrics. The incredible resilience of our domestic residential real estate market is consistent with observations from other parts of the world too. In the UK, for instance, house prices are accelerating at their fastest pace since BREXIT.

Source: Bloomberg, Quay Global Investors

And in the US, despite the sharp rise in mortgage delinquency rates, prospective home buyer activity (as measured by foot traffic) is at its highest level since 1994, matching the recent surge that has been seen in existing home sales.

Source: US Bureau of Economics, Quay Global Investors

Retail also doing well

Residential property metrics are not an outlier. Another economic indicator that appears to defy the current economic narrative has been retail sales.

In Australia, ABS retail sales for July showed retail sales were up a significant 12% year-on-year. This bounce is more than just a catch-up from the April slump. On a rolling 12-month basis, we estimate Australian retail sales are now up 3.7% compared to the previous corresponding period.

Source: ABS, Quay Global Investors

In fact, Australians have spent an additional $12 billion in the 12 months to July 2020 compared to the 12 months to July 2019.

While much has been made of the strength of the online shopping business models during this period, this retail activity is not all online either. During the recent Scentre group earnings call, it was noted that portfolio in-store retail sales during July were actually above those of July 2019, including Victoria (which went into lockdown on 9 July).

Overseas retail experience

We can observe similar data trends in retail sales in the US. While it is not quite as strong as Australia, total retail sales are nevertheless higher on a rolling 12-month basis.

Source: US Census Bureau, Quay Global Investors

The US is not alone. In Germany, for instance, retail sales for the six months to June are 0.8% higher than the previous six months.

So, what’s happening to explain the rise of residential and retail?

Explaining the data via sectoral balances

It would be easy to suggest the observed data in residential and retail is a result of a ‘sugar high’ from fiscal stimulus – and indeed, that could be part of the story. As well, many consumers have been denied certain spending ‘avenues’ in 2020, most obviously air travel, entertainment and eating out. It may well be that the additional dollars are simply being spent elsewhere.

But we think there is more to it than that.

For the best part of 10 years, the common narrative has been that the Aussie consumer is ‘dead’. Weak wage growth coupled with very high levels of household debt has constrained the consumer. And the data certainly supported this argument.

Source: ABS, Bloomberg, UBS

But the massive fiscal response to the lockdown from most governments will go a long way to repairing household balance sheets, freeing up the way forward for increased consumer spending.

Regular readers of our articles will know from the sectoral balances’ framework, that government financial deficits equal non-government financial surpluses. (The non-government sector includes businesses, households and the foreign account – aka the current account deficit.)


Register here to receive the Firstlinks weekly newsletter for free

The US GFC experience

Below is a chart of the sectoral balances in the US in response to the financial crisis in 2008-09, clearly showing the significant increase in net financial assets (cash and bonds) accruing to the domestic private sector as a result of the Obama-driven American Recovery Act. This was a major reason why the US avoided repeating a second Depression.

Source: Tipping Point North South

What is interesting about this chart (and Australia is similar) is the American Recovery Act deficit measured $831 billion. The current CARES act is closer to four times the size, at $3.5 trillion.

Similarly, in 2009 the Australian government stimulus to the financial crisis was $45 billion, or 4.5% of GDP. Today’s response is closer to $150 billion.

Even after allowing for 10 years of inflation, the sheer scale of government spending now is multiple times that undertaken during the GFC.

The bottom line is that household balance sheets (and corporate profits) are receiving a significant boost from net government spending. And until governments reverse course and start generating surpluses (which we do not envisage any time soon), these net financial assets will continue to reside in the private sector, permanently repairing balance sheets and setting up households for the next cycle, as the household savings ratio from the national accounts confirms.

Source: ABS, Quay Global Investors

Conclusion: the power of public spending

This has been a very unpredictable economic cycle. Despite a one-in-100-year pandemic and near-depression levels of unemployment, residential property prices and retail sales are not following the widely expected doomsday script. While the recent data could of course be temporary, we think it is also helpful to view the recovery and other leading indicators from a sectoral balances’ framework.

Much in the same way that many financial commentators overestimated the power of central banks during the last decade (see our Investment Perspectives article which suggests the Federal Reserve does not influence long-term stock market returns), we believe there is an equal risk they will underestimate the power of the public purse now.

 

Chris Bedingfield is Principal and Portfolio Manager at Quay Global Investors. This article is general information and does not consider the circumstances of any investor.

 

4 Comments
David Wilson
October 01, 2020

Well, what about that. According to the author, who has a vested interest in the property sector, the expectation is that "a strong case can be made that by the time we reach the fourth quarter this year, residential prices in some of our main cities will in fact be rising."
This is laughable. He is asking us to believe that residential property prices are going to rise despite zero immigration for the best part of 2020 (and likely 2021 also); record household indebtedness; record unemployment and the prospect of many businesses going to the wall when JobKeeper payments are removed. Further, bank share prices are currently very depressed given the likely increased imminent mortgage default rates.
Hmm. Something is wrong with this picture!

Jonathan
October 01, 2020

Well, David. From AFR today, seems to confirm this article's view: "September marked a striking turn in housing market sentiment; consumer confidence increased, new listings rose, and six of the eight capital cities recorded a rise in home values over the month," Corelogic's head of research Tim Lawless said.

Stuart Musgrave
October 01, 2020

Government stimulus is part of the equation, and household balance sheets have also benefited from mortgage drawdowns, payment deferrals and early superannuation withdrawals. This has created buffers for many.
However as trading whilst insolvent provisions ending will see insolvencies and unemployment rise to 10%. Buffers will be exhausted, creating the real possibility that 5-10% of the 500,000 mortgages in deferral will not recover.
Indications so far are that the Federal budget will not stimulate demand sufficiently to create significant employment, keeping unemployment above 8.5% until the end of 2021.
Let's not get lulled into a false sense of security now, because things aren't looking that great for 2021 H1

vic jokovic
October 01, 2020

Great article Chris . Incredibly informative .

 

Leave a Comment:

     

RELATED ARTICLES

The coiled spring: markets are primed for the year ahead

Why we see opportunities in consumer-related stocks this year

Seven key charts on the global economy and investments

banner

Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates

Superannuation

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.

Superannuation

How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.

Retirement

Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.