If house prices have bottomed, should I buy property-related ASX shares?

Australia’s housing prices may have hit a bottom and could start recovering. Could this be a promising sign for ASX property shares?

Earlier this month, property price data business CoreLogic revealed that national home prices increased 0.6% in March. CoreLogic executive research director Tim Lawless said:

While we aren’t certain if March marks a turning point for housing values, it’s clear that low advertised supply, the tightest rental conditions on record and surging overseas migration are providing some positive momentum to housing markets.

It may be surprising that house prices have already bottomed considering borrowing costs have soared significantly and ASX bank share arrears haven’t even registered a noticeable uptick yet.

The investment bank Morgan Stanley has suggested that any bounce could be premature for property and related businesses, according to reporting by the Australian Financial Review.

Why is Morgan Stanley being cautious?

The Reserve Bank of Australia (RBA) has significantly hiked the interest rate in Australia, but recently paused the increases. However, the investment bank is expecting the RBA could increase the interest rate with two 25 basis point (0.25%) increases in August and September to take the cash rate to 4.1%.

Morgan Stanley said that while the RBA has paused interest rates, it could be a while before interest rates start falling. It also noted ASX retail shares have gone up before the worst of a downturn in sales had even started.

Morgan Stanley’s head of Australian strategy and economics Chris Nicol said:

We detect a bias in positioning to consider the interest rate pause as a precursor to ultimate easing of conditions and the start of the next housing cycle – hence the bounce in cash rate-sensitive sectors.

To us this looks somewhat premature – our conclusion is that buying into housing and consumer-facing stocks has poor risk-reward at this juncture.

When looking at prior housing cycles – the bulk of price declines occur when the RBA is on hold. And given our expectation of a prolonged period before policy actually eases, a return to price weakness cannot be ruled out.

One of the factors that suggests to the investment bank that the RBA will need to increase interest rates further is because the jobs market continues to be stronger than expected, with the March report showing 53,000 found work, compared to expectations of 20,000. The unemployment rate is still at 3.5%.

Are ASX property share values going up?

Since 2 March 2023, the REA Group Limited (ASX: REA) share price has risen 18%, the Domain Holdings Australia Ltd (ASX: DHG) share price has gone up 10%, the CSR Limited (ASX: CSR) share price has risen 3.75%, the JB Hi-Fi Limited (ASX: JBH) share price has risen 6.7%, and the Wesfarmers Ltd (ASX: WES) share price has gone up 8.4%.

Should they be going up? That’s an entirely different question.

Morgan Stanley is saying it’s too early – we haven’t even seen how bad the effects of the interest rates are going to be.

The COVID-19 recovery seemed to start when central banks around the world started providing enormous support. Interest rates are probably not going down for quite a while yet, and could stay a lot higher than pre-COVID times for a while after that.

Valuations typically follow earnings over time. I think businesses like REA Group and Wesfarmers will be capable of producing higher earnings over the long term as they grow their market position and margins.

I’d guess there’s a chance that share prices will fall noticeably below where they are now over the next six to 12 months — if/when there’s a deterioration of trading conditions because of the higher interest rates.

However, I’d also say the share prices earlier this year were very good buying opportunities and those shares are still down materially from their COVID-19 peaks.

The post If house prices have bottomed, should I buy property-related ASX shares? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Jb Hi-Fi and REA Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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