With looming changes to the capital gains tax treatment for investment in housing, Citi Research has downgraded its outlook for the housing market, and by extension, the big four banks.
In a research report published this week, Citi says it has downgraded its credit growth assumptions to 4% system growth by FY27, with business at 5%, and mortgage credit at 3.5%.
Image source: Getty Images
Bank earnings to come under pressure
Citi said re the banks:
This drives modest earnings downgrades for the majors on our numbers. The policy impact adds to the already unfavourable stagflation outlook for the Australian banks, with close to peak rates, slowing growth and rising credit risk.
Citi said there was "prior precedent" that could help investors understand the impact of regulatory intervention in the housing market.
Given Australia's fascination with property, this is not the first attempt to bring investor animal spirits in check. The mid-2010s saw a vast slowdown in investor credit as APRA applied a speed limit to investor credit growth, strengthened serviceability and other changes were made to borrowing power and risk weights. The net result was a slowdown in investor credit from ~11% to ~2% over 15 months. Similar tightening took place across the Royal Commission period as tightening of serviceability by the banks saw investor credit fall from ~4% to 0% over an 18-month period. Investor lending commitments were down ~30-40% in both instances.
Citi said that with fewer investors in the market, the question was whether there would be an offset from more owner-occupiers, including first-home buyers.
They said:
Back in the mid-2010s, despite investor credit decelerating from ~11% to ~2%, we saw overall housing credit only experience a ~1% slowdown because less investor credit was offset by owner occupier credit accelerating from ~5% to ~9%. With a clearer playing field, the owner occupiers effectively stepped into the gap, a move that was aided by falling rates which improved borrowing capacity.
ANZ leading the pack
In terms of the banks, Citi's order of preference is ANZ Group Holdings Ltd (ASX: ANZ) with a buy rating, National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) both with a neutral rating, and Commonwealth Bank of Australia (ASX: CBA) with a sell rating.
Citi said:
We think CBA's multiple holds greatest risk to a slowdown in the housing market given its stretched starting point, and hence we reiterate our Sell Rating.
Citi has price targets of $39.25 for ANZ, $135 for Commonwealth Bank, $36.75 for NAB, and $39 for Westpac.
