The impact of housing figures on real estate shares

Real estate shares are in a very strange place right now. After months of speculation, the real estate market seems to have finally taken a dive in the past month. A recent building approval report from The Australian Bureau of Statistics shows that for new house approvals for May were softer at 4.4% from April’s figures. Private sector dwellings excluding houses were down a massive 34.9%. The number of total dwellings was down by 16.4% compared to April. 

The value of total building approved fell 13.5% in May, in seasonally adjusted terms. The value of residential building fell 17.3% while non-residential building declined 7.1%.

The ABS goes on to point out that due to the lag in the process, the May data likely reflects applications and levels of demand prior to the introduction of major restrictions. 

Real estate shares impacted

While this lag means the worst is yet to come in terms of figures, the market expects the government HomeBuilder stimulus to cushion the blow significantly.

Mirvac Group (ASX: MGR) has worked with an estimated value of $18.8 billion in progress, with a further $2 billion planned. According to the company’s H1 Analyst toolkit, they have only settled 37% of these houses. The company has entered into $810 million of new debt facilities over 3–4.5 years. This has provided the group with cash and undrawn debt facilities in excess of $1.3 billion with only $200 million of debt due for repayment between now and early 2022.

Stockland Corporation Ltd (ASX: SGP) has 76,000 lots remaining with an estimated market value of $21.7 billion according to its 30 June 2019 portfolio. However, the company has reported a level of pent up demand. Notably, since mid-May residential real estate has recovered to above pre-COVID levels. Moreover, this has translated into an accelerated pace of net sales achieved. 

On Wednesday the 2 real estate shares saw increases. The Mirvac share price rose by 1.8% and the Stockland share price rose by 4.2%.

Foolish takeaway

At the same time that the ABS data has shown a very steep decline in approvals of new dwellings; houses and apartments, house prices have also started to fall. I think there are several ways that this can play out.

The HomeBuilder stimulus is going to have a positive impact on new houses and it is likely the lag time in the market that has obscured this. However, the banks are unlikely to allow for a stay of housing loan repayments beyond September. In fact, the Commonwealth Bank of Australia (ASX: CBA) has already stated it wouldn’t extend COVID-19 support beyond 30 June. 

There is simply no doubt that we live in interesting times. Even if the Prime Minister was to extend JobKeeper and/or Homebuilder, which is now a rapidly growing expense to future generations, it is only part of the picture. Residential real estate-exposed shares are far too uncertain for me, and not somewhere I would currently invest in.

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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. 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.

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