Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 414

Will the house price boom be a boon for Australian banks?

Recent data released by the ABS and CoreLogic shows that median house prices in Australia rose 14.9% in the year to 31 May 20211. This has taken house prices to record levels, with a near unprecedented acceleration triggered by, among other factors, the COVID-19 pandemic crisis response to cut interest rates to near zero levels.

House Price Index

Source: Martin Currie Australia, ABS, CoreLogic; as of 31 May 2021. $ value represents average CoreLogic value April / May

National Housing Price Cycles

Source: Martin Currie Australia, ABS, CoreLogic; as of 31 May 2021

House prices have supported improving risk metrics for the banks

This boost in house prices has aided banks by contributing to credit growth, but more importantly, rising house prices have been a feature of the improving economic backdrop that has supported bad debt releases and lower risk weights.

This trend can be seen in recent reporting for banks, such as in the improvement in the level of bad debt expenses and risk-weighted assets (RWA) ratios2.

Commonwealth Bank

ANZ Bank

NAB

Westpac

Additionally, the consequent consumer confidence lift should support spending, as we cycle off stimulus payments, and this should in turn afford banks more comfort with the outlook for bad debts.

House prices seem stretched, but loan growth should improve

In October 2019 we published an article that described the credit-centric outlook model we use for forecasting house prices. This model looks at both credit supply from banks and demand from borrowers, and is grounded in the theory that house prices and debt levels largely reflect the capacity of borrowers to service and access debt.

The model creates a property demand curve that looks at the ‘average’ property and the average available funds to purchase that property from three cohorts of buyers – ‘theoretical’ cash buyers, geared investors and geared owner occupiers. It follows that at any given time, the marginal demand price setter will be the second highest of these three categories.

Generally, for house prices to rise, the supply of credit to purchase property must match or exceed the demand from borrowers. Our assessment is that despite the reduction in variable mortgage rates supporting higher prices, floor rates and maintenance of reasonable lending criteria by the banks mean the marginal supply curve will not support a continuation in the current demand driven spike in house prices.

Property buyer demand3

Credit supply and housing demand3

Prior to COVID-19, in mid-2019, our model had foreshadowed a healthy period of house price growth, but today, this approach suggests the national price move has outrun the fundamentals and should again fall to meet more constrained credit supply from banks.

Saying this, post the one-off paydowns driven by superannuation withdrawals and stimulus payments, and a restart in paused spending during COVID-19, we do expect to see a reduction in paydown activity and a higher average size of loan.

This means that despite a potential fall in future house prices, credit growth should rise, and this will support bank earnings.

House price forecast3

Lending growth and approvals3

More provision unwinding to come…

As such, we believe that the benefits to bank capital and asset quality have further to run.

A combination of accounting and risk models dealing with an unprecedented pandemic resulted in collective bad debt provisions being raised well ahead of problem loans, and capital buffers created to deal with risk weighted asset inflation.

While bank management is still digesting the recent movements in house prices and better than expected economic growth data, this process should inevitably drive a more sanguine view of overall asset quality, and flow into lower capital intensity and capital releases4.

Commonwealth Bank

ANZ Bank

NAB

Westpac


Register here to receive the Firstlinks weekly newsletter for free

… leading to a strong earnings outlook for the banks5

We believe that the over-zealous provisions have further to be released as the broader economic buoyancy flows through to an improved outlook for bad debts and further earnings momentum.

The outlook for consensus bad debts assumes much of this provision build is still utilised into 2022. We think the evidence is to the contrary, and as a result we should continue to see positive earnings momentum as the market improves their forward-looking bad debt forecasts for the banking sector.

Overall, in our Value Equity strategy, we are favouring on overweight position to banks, with higher active weights in ANZ Bank and NAB, a neutral position in Westpac, and an underweight in Commonwealth Bank (albeit we materially reduced this earlier in the year), due to the potential for valuations to better reflect bad debt unwinding, capital returns and improved credit growth.

From our Equity Income strategy, which focusses on Sustainable Dividends, we like the dividend opportunities from all banks, but we see Westpac’s dividend having a slower dividend recovery than its peers.

 

1Source: Martin Currie Australia, ABS, CoreLogic; as of 31 May 2021. For established houses across the eight capital cities.
2Source: Martin Currie Australia, FactSet, company reports; as of 31 March 2021
3Source: Martin Currie Australia, ABS, Bloomberg, CoreLogic, FactSet; as of 31 March 2021
4Source: Martin Currie Australia, FactSet, company reports; as of 31 March 2021
5Source: Martin Currie Australia; as of 31 May 2021. Based on a representative MCA Value Equity (Index: S&P/ASX 200 Accumulation) and MCA Equity Income account.

 

Matthew Davison is a Senior Research Analyst at Martin Currie Australia, a Franklin Templeton specialist investment manager. Franklin Templeton is a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any individual. Past performance is not a guide to future returns.

For more articles and papers from Franklin Templeton and specialist investment managers, please click here.

 

RELATED ARTICLES

Australian house prices: Part 1, how worried should we be?

Australian house prices: Part 2, the bigger picture

History repeats on housing, but how long will this last?

banner

Most viewed in recent weeks

Unexpected results in our retirement income survey

Who knew? With some surprise results, the Government is on unexpected firm ground in asking people to draw on all their assets in retirement, although the comments show what feisty and informed readers we have.

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Six COVID opportunist stocks prospering in adversity

Some high-quality companies have emerged even stronger since the onset of COVID and are well placed for outperformance. We call these the ‘COVID Opportunists’ as they are now dominating their specific sectors.

Latest Updates

Retirement

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Interviews

Sean Fenton on marching to your own investment tune

Is it more difficult to find stocks to short in a rising market? What impact has central bank dominance had over stock selection? How do you combine income and growth in a portfolio? Where are the opportunities?

Compliance

D’oh! DDO rules turn some funds into a punching bag

The Design and Distribution Obligations (DDO) come into effect in two weeks. They will change the way banks promote products, force some small funds to close to new members and push issues into the listed space.

Shares

Dividends, disruption and star performers in FY21 wrap

Company results in FY21 were generally good with some standout results from those thriving in tough conditions. We highlight the companies that delivered some of the best results and our future  expectations.

Fixed interest

Coles no longer happy with the status quo

It used to be Down, Down for prices but the new status quo is Down Down for emissions. Until now, the realm of ESG has been mainly fund managers as 'responsible investors', but companies are now pushing credentials.

Investment strategies

Seven factors driving growth in Managed Accounts

As Managed Accounts surge through $100 billion for the first time, the line between retail, wholesale and institutional capabilities and portfolios continues to blur. Lower costs help with best interest duties.

Retirement

Reader Survey: home values in age pension asset test

Read our article on the family home in the age pension test, with the RBA Governor putting the onus on social security to address house prices and the OECD calling out wealthy pensioners. What is your view?

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.