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Published 07 February 2013 01:10, Updated 07 February 2013 15:57
The confidence lift from a global sharemarket rally should fuel demand in the high-end property market. Photo: Fairfax Media
T he global sharemarket rally is not only good news for stocks. Property, too, will benefit as the wealth effect from rising share prices lifts demand for pricier houses and boosts consumer confidence. Some property-related stocks should rally further as a modest housing recovery takes hold.
It almost seems unfashionable to take the middle ground in property price debates, which are always fought at the extremes between the bears, who believe our property prices are wildly overvalued and ripe for a crash and the bulls, who argue that record low interest rates eventually will put another rocket under housing demand and prices.
More likely is a year of solid, single-digit gains in property prices and a gradual, though uneven, housing construction recovery.
Recent data does not suggest big gains in housing construction this year. Residential land sales, a leading indicator of housing starts, fell 17.8 per cent in the September quarter, Housing Industry Association data shows. Land demand is still well up on the lows set a year earlier and there was a modest rise in home building activity in the same quarter – at best a slow recovery.
Also, 175 basis points of rate cuts since October 2011 has had a muted effect on consumer confidence: the Westpac Melbourne Institute Index of Consumer Sentiment barely moved higher in January. Clearly, this cycle is unlike previous ones as consumers save more and worry about job security. Do not assume interest rate cuts will have the same effect on property as in the past because the shadow of the GFC still looms large.
But confidence can change quickly. The Australian sharemarket’s 20 per cent gain (including dividends) over one year is good news for superannuants and long-suffering buy-and-hold investors who have watched their wealth shrink in recent years. Even better are front-page headlines about the rising sharemarket and improving superannuation balances.
The sharemarket rally looks overdone but it is at least built on a foundation of diminishing “tail” risks, as concern fades over the extreme threats of Europe imploding, China stalling and recession in the United States. Many challenges remain but the market largely discounted them when it flirted with 4000 points in June 2012.
Anecdotal reports that it is now cheaper to buy than rent in most capital cities will further fuel property confidence in 2013.
How then to capitalise on a firmer recovery in housing construction and greater demand for existing property?
The obvious candidates are the big four bank stocks but caution is needed after share price gains in the past year.
Building material stocks are another option. With James Hardie Industries and Boral sharply higher in recent months, CSR looks more attractive on a relative basis, although it comes with an aluminium division. I can’t get excited about smaller building materials companies, such as GWA International , which seem more like “holds” than “buys” after recent rallies.
Discretionary retailers are another way to play an improving property market. Furniture retailer Fantastic Holdings has starred with a 71 per cent total shareholder return over one year.
Among smaller stocks, residential developer Cedar Woods Properties has impressed with record profits, a higher dividend, and a 20 per cent return on equity. If the Perth-based company can deliver strong gains in a sluggish housing market, what will it do when property demand strengthens?
Onthehouse Holdings is another small-cap attracting attention. The online property information company slumped to 33¢ from a $1 issue price within months of its 2011 listing before recovering to 88¢. I like Onthehouse’s strategy to provide data and listing information. Onthehouse is not cheap. But watch for these and other property related stocks to be re-rated as the rising sharemarket feeds into consumer confidence and housing demand.