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New cracks in the housing market that should worry ASX investors

The news seems to be getting worse for ASX-listed residential property companies with a media report that claims that one-in-four housing lot sales in Melbourne are falling over.

The report carried by the Australian Financial Review doesn’t seem to have fazed investors today with the Lendlease Group (ASX: LLC) share price, Stockland Corporation Ltd (ASX: SGP) share price and Mirvac Group (ASX: MGR) share price chalking up gains of 0.4% to 1.6% in late afternoon trade.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 0.6% as strength in the mining, technology and industrials sectors helped stimulate risk appetite among investors.

Big defaults

But I think this reporting season won’t be pretty for stocks leveraged to the residential market, particularly after Nigel Satterley (he runs the country’s largest private land developer) told the AFR that up to 25% of buyers of land in new housing estates will either default or need to on-sell quickly.

The fall over rate in Sydney is a little better at around 15% while Perth is at about 35%, said Mr Satterley.

Many land buyers are allegedly speculators. These buyers put down a deposit on the land (or house and land package) with the aim of selling it to desperate homebuyers at a profit before settlement.

These speculators do not have the ability to take out a bank loan and that makes their situation all the more desperate in this market where property prices are falling.

Make no mistake – this is a buyer’s market now and the strategy of flipping land only works well when it’s a seller’s market.

The sale of house and land packages in Melbourne has fallen to 10,000 a year from 25,000 a year just 18 months ago, added Mr Satterley and he thinks land prices will fall a further 7.5% to 12.5% while established house price would decline another 10% to 12.5%.

Stocks in the firing line

That’s not good news for the likes of Stockland although Lendlease could weather the downturn better given its more diversified business model that is leveraged to infrastructure construction (assuming it doesn’t issue any more writedowns).

Mirvac is more exposed to Sydney apartments than house and land packages but this is another stock I wouldn’t touch as the apartment market is among the weakest spots of the property sector, in my opinion.

The report also makes for grim reading for the big banks with the likes of Commonwealth Bank of Australia (ASX: CBA) share price underperforming today after posting its profit result.

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Motley Fool contributor Brendon Lau owns shares of Commonwealth Bank of Australia. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.