Where RBA sees affordable homes, Stockland's Quinn sees a tough market

DESPITE the protestations by the Reserve Bank governor defending housing affordability, the country's biggest housing developer said yesterday conditions were the weakest it had experienced for 20 years.

By InvestSMART · 9 Aug 2012

By InvestSMART ·
9 Aug 2012

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Stockland's managing director Matthew Quinn said that the market for new housing remained soft and lower mortgage rates were not yet having the same positive impact as in previous cycles.

"I've been in the market since 1988 and I think this is arguably the most difficult housing market I've seen probably in the last 20 years," he said. "But we are at the mercy of the cautious consumer and the fact that households are deleveraging."

According to Mr Quinn, there are signs the market is near the bottom but recovery is likely to be slow because consumers remain cautious and lack urgency.

In contrast, the governor of the Reserve Bank, Glenn Stevens, last month dismissed talk of a housing bubble, adding that, in his opinion, prices were not unreasonably high.

"It has to be said that the housing market bubble, if that's what it is, seems to be taking quite a long time to pop - if that's what it is going to do," he said.

"Australian dwelling prices on a national basis have in fact declined and are now about where they were in 2002. That is, housing has become more affordable."

Mr Stevens's opinion was supported by data released yesterday by the Australian Bureau of Statistics, which showed that the value of all home lending rose by 2.4 per cent, with owner-occupier loans up by 1.2 per cent, while investment loans rose by 4.9 per cent.

In his commentary on Stockland's full-year result, Mr Quinn, attributed the tough conditions to three factors - jobs, interest rates and home prices.

The commercial sector is also under pressure.

NAB released its Quarterly Australian Commercial Property Survey June 2012. Its commercial property index slip to a new low of -16 points as fewer property professionals expect positive capital or income returns.

The report says retail and industrial market participants are pessimistic, but expectations are also softer in office and CBD hotel markets.

As for Stockland, having spent the past four year streamlining the group's strategy to focus on the residential, retail and retirement sectors, the group is now being hit as investor spending retracts significantly in all three.

Without issuing a specific guidance number, Mr Quinn said the short-term earnings outlook remained "highly uncertain".

He said that unless residential market conditions improved significantly within the next few months, "the 2013 financial year earnings per security [EPS] is likely to be lower than in the year to June 30, 2012".

Despite a fall in EPS, the current 24? distribution would be maintained, but done so by increasing the payout ratio, if needed, beyond the current 85 per cent maximum, rather than from improving sales.

As the group had flagged, for the year, excluding one-off adjustments, the underlying net profit fell 7 per cent to $676.1 million, out of which the annual distribution of 24? was paid.

Macquarie Equities analysts said they had been expecting residential margin pressure to come through, "however the actual result and the 2013 outlook is even worse than what we were anticipating".

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Frequently Asked Questions about this Article…

What did Stockland's managing director say about the current housing market and what it means for investors?

Stockland managing director Matthew Quinn said the market for new housing was the weakest he had seen in about 20 years, calling conditions ‘arguably the most difficult’ in that period. He highlighted cautious consumers and household deleveraging as reasons the market remains soft, and said any recovery is likely to be slow. For investors, this means developers’ short-term earnings are uncertain and sales momentum may remain subdued until consumer confidence improves.

How does the Reserve Bank governor view housing affordability compared with Stockland’s outlook?

Reserve Bank governor Glenn Stevens rejected talk of a housing bubble and said, in his view, prices were not unreasonably high. He noted national dwelling prices have declined and are around 2002 levels, arguing housing has become more affordable. This contrasts with Stockland’s view of a very weak market — illustrating differing perspectives between the central bank and some industry participants.

What recent home lending data from the Australian Bureau of Statistics should investors know about?

The Australian Bureau of Statistics reported that the value of all home lending rose by 2.4%. Owner-occupier loans increased by 1.2% while investment loans rose by 4.9%. These lending movements were cited in the article as supporting the Reserve Bank governor’s comments about improved affordability.

Which factors did Stockland cite as driving the tough housing market conditions?

Stockland attributed the difficult conditions to three main factors: jobs, interest rates and home prices. The company said weakness across these areas has reduced buyer urgency and investor spending, affecting residential, retail and retirement segments.

What did Stockland say about its earnings outlook and distribution policy?

Stockland described the short-term earnings outlook as 'highly uncertain' and warned that, unless residential market conditions improve significantly within a few months, earnings per security for the 2013 financial year were likely to be lower than the year to June 30, 2012. Despite this, the company said it would maintain the current distribution, and if necessary could do so by increasing the payout ratio beyond the current 85% maximum rather than relying on improved sales.

What did NAB’s Quarterly Australian Commercial Property Survey say about commercial property sentiment?

NAB’s June 2012 commercial property survey showed the commercial property index slid to a new low of -16 points, indicating fewer property professionals expect positive capital or income returns. The report said retail and industrial participants were particularly pessimistic, with softer expectations also in office and CBD hotel markets.

How did analysts at Macquarie Equities react to Stockland’s results and outlook?

Macquarie Equities analysts said they had expected residential margin pressure, but that Stockland’s actual results and the 2013 outlook were even worse than they had been anticipating, reflecting the tougher-than-expected housing conditions described by the company.

What practical takeaways for everyday investors emerge from this article about the housing market and property companies?

Key takeaways are: developers like Stockland are signalling a weak residential market and uncertain near-term earnings; the Reserve Bank and ABS data point to improved affordability on a national basis; commercial property sentiment is weak per NAB’s survey; and investors should watch jobs, interest rates and lending trends closely, as these are cited drivers of housing demand and company earnings. These are factual points from the article that investors can monitor when assessing property-related investments.