Mortgage interest rates are at lows not seen since the 1960s, so you would think that the housing market would fire up, and take off like it did in the early- and mid-2000s. Still, that hasn’t happened yet. Sydney and Perth properties are warming up, and auction clearance rates are increasing. The lingering effects of the GFC, weak international economic data, and a slump in the Australian mining industry is dampening the appetite of investors and buyers for property.
The Dow Jones Industrial Average (Index: ^DJI) has hit new all-time highs, leaving the 2009 GFC low far behind. The ASX All-Ords index (ASX: XAO) recovered back to 5,000 in 2011, yet since then has been held in a trading range. The high Aussie dollar has made it hard for exporters and domestic market businesses, mining expansion is slowing, and changing conditions in China have also had an effect.
Housing construction companies AV Jennings (ASX: AVJ), Stockland (ASX: SGP), Devine (ASX: DVN) and Mirvac (ASX: MGR) have all moved sideways since 2009, but are challenging that year’s highs now. When the housing market picks up, existing homes show the first movement, then the momentum moves to house and unit builders that are supplying new homes. When the next property boom does show itself, the sales go up and the profit margins expand.
Mirvac has better financials than the other three, more stable revenues over recent years, acceptable levels of debt, profit levels growing since 2009, and high net profit margins. One concern is that its quick ratio is below 1. The quick ratio is harsher than the current ratio (current assets divided by current liabilities) in that it subtracts inventories from current assets, so it is more of an acid test for a company facing cash flow problems.
Property booms start in capital cities, and then go out from there in waves. Being a unit developer, Mirvac would only be building in or close to CBD areas, and as a REIT it gets a fair proportion of revenue from investments. Based on stronger financials and recent performance, it would be best prepared for an upturn in the property market when the Australian economy improves and aligns better with US and international financial markets.
Property is a lagging economic indicator because it is only when you feel you have enough extra money to pay for a home or investment that you actually buy one. Your income has to be stable and growing before you take the leap, and that is based on your company and the general economy doing all right. In contrast, the stock market is a leading indicator because traders and investors are always looking at what will happen six months to a year from now.
The US market is improving, Europe is starting to bottom out and even beginning a slight turnaround. When China stabilises, even at a lower growth rate, then the Australian economy will see more expansion. In the meantime, pent-up housing demand here will build up and drive the boom when markets are in sync once more.
Motley Fool contributor Darryl Daté-Shappard does not own shares in any of the companies mentioned in this article.