The latest property data from Cotality has indicated that Australian home values continue to fall.
Cotality's national Home Value Index fell 0.9% in August, marking a fifth consecutive month of decline and taking national home values 3.6% below the market peak recorded in March.
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Property snapshot
According to the report, home value declines spread sharply across Australia's housing market through winter, with home values falling across 93% of capital city suburbs. Every capital city except Darwin has recorded a decline over the past three months.
Tim Lawless, Cotality's Research Director, said the latest figures show the downturn is no longer confined to select markets or higher-value segments.
What started as a more concentrated easing across higher-value segments has now become a much more generalised softening, with the vast majority of capital city suburbs recording some level of decline.
The proportion of capital city suburbs recording a fall in home values more than doubled through winter, rising from 45.8% in autumn to 93%, highlighting a much broader weakening in housing conditions.
How does this impact real estate shares?
As investors look at these numbers, the important distinction is that falling Australian house prices do not automatically mean all ASX property stocks will suffer.
However, there are some important considerations.
Firstly, residential developers – these are likely the most vulnerable.
Companies selling new houses/land can be hit by lower selling prices, slower presales, cancellations and weaker margins.
If the housing correction continues, these equities are the ones I would be most cautious about.
Looking at REITs, falling residential house prices don't directly determine the value of office, industrial, logistics, retail or healthcare property.
For REITs, interest rates, bond yields, debt costs, occupancy and rental growth can matter considerably more.
Finally, property/infrastructure owners with long leases are potentially relatively defensive.
Retail, logistics, healthcare and other assets with strong occupancy and contractual rental increases can continue generating cash flow even while residential property falls.
Why interest rates are the bigger issue
While investors may focus on dwelling prices, interest rates are the more important issue at hand.
The housing decline is partly a consequence of higher borrowing costs, so the same monetary tightening that hurts residential property can hurt listed property.
Higher rates increase REIT financing costs, which can reduce distributions and funds from operations.
This can push property valuations lower and ultimately weigh on share prices.
Based on these factors, the ASX real estate shares that could offer defensive profiles are:
- Goodman Group (ASX: GMG) – Major exposure to logistics and data centres rather than Australian residential property.
- GPT Group (ASX: GPT) – More diversified across office, retail and logistics and less directly exposed to the residential downturn.
