Companies from banks to retail are going to be affected by the forecast housing slowdown, Macquarie analysts say, with Commonwealth Bank, NAB, Harvey Norman, CSR and JB HiFi among those expected to suffer a hit to the bottom line.
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The investment bank's economists believe home values are set for a 7.5 per cent decline from March next year.
While the prediction will no doubt cheer first home buyers, the resulting slowdown in housing credit is set to hit the nation's biggest lenders, in particular Commonwealth Bank of Australia and National Australia Bank, Macquarie says.
"Our economics team are forecasting quarter-on-quarter house prices to fall from the March 2016 quarter before beginning to recover from June 2017," Macquarie Research said in a briefing note.
The banks would not be affected equally by the fall in housing credit, it said.
Macquarie predicted CBA would be most affected given its larger mortgage portfolio and momentum in the investor market, on which the banking regulator had set a 10 per cent annual growth limit.
It said CBA's cash earnings per share would decline 3.5 per cent by 2017-18, and downgraded its target share price 9.4 per cent to $91.91.
National Australia Bank would be the second most affected because of its high number of investor loans.
Its cash earnings per share would decline 2.7 per cent by 2017-18, said Macquarie, which downgraded its target share price 5.2 per cent to $38.39.
ANZ would be the third most affected, assisted by its strong momentum in owner-occupier lending; although this was expected to be offset by moderating investor growth.
Its cash earnings per share would decline 1.9 per cent by 2017-18, said Macquarie, which downgraded its target share price 4.6 per cent to $32.60.
Westpac would be least affected because it complied quickly with the Australian Prudential Regulation Authority's cap on lending to investors.
Its cash earnings per share would fall 1.9 per cent by 2017-18, said Macquarie, which downgraded its target share price 3.4 per cent to $36.69.
As a result of this analysis, Macquarie has also updated its bank preferences: Westpac is its top pick as it is "least affected following our analysis"; NAB is No. 2 "with the turnaround story still intact"; CBA is at No.3 "with repricing to reduce the impact of a housing cycle downturn"; and ANZ is last, "given bank-specific concerns around asset quality and exposure to a slowing Asia".
However, other sectors besides banking would be affected by the housing slowdown, Macquarie said.
In particular, housing had been a positive for the retailing sector over the past two years, the bank said.
"Housing is a key swing factor for a number of retailers,'' the bank said. "While this has supported growth in recent years . . . the negative housing outlook from the Macquarie Economics team indicates this tailwind is unlikely to be sustained in the second half of 2016 and is likely to become a headwind to growth in 2016-17 and 2017-18."
Macquarie's advice on retail stocks that would be affected as a result of the housing slowdown:
- Wesfarmers, for which the bank had a "clear preference". The consumer blue chip was "a high-quality, defensive consumer stock which is outperforming across its retail businesses".
- JB Hi-Fi, while better than Harvey Norman, was downgraded to "underperform" from neutral. "The macro headwinds are likely to more than offset the operating outperformance of JB Hi-Fi within the consumer electronics sector".
- Harvey Norman was exposed to "further downside risk" as it was "the most property-exposed retailer".
The slowdown in housing construction would also negatively affect the building materials market, the bank said.
"Our economics team expect aggregate housing unit commencements of 161,000 in 2016, compared to general estimates closer to 200,000. This bodes negatively for building materials suppliers."
- James Hardie remained "our favoured exposure in the sector".
- CSR was downgraded from outperform to underperform because of the "rollover in housing activity combined with ongoing weak aluminium market fundamentals".
- Dulux Group retained its outperform rating because of its "exposure to alteration and addition activity".
- Boral and Adelaide Brighton Cement retained neutral ratings. Despite the slowing housing market, a "prospective offsetting recovery in infrastructure activity is expected to provide some underpin".
- Brickworks was downgraded to underperform from neutral. "A rerating over recent months is expected to be eked away by declining housing market activity."
