Why are Australian property prices tumbling? How are ASX stocks faring?

Highlights

• Numerous factors, including high interest rates and growing inflation, have crippled the Australian property market.
• This year, Australia is registering the fastest series of hikes in interest rates ever since 1994.
• The scenario for the housing market has been the worst in Sydney and Melbourne as they are witnessing the largest declines in housing prices.

The Australian property market has been enduring a lot for the last few months due to the changing economic conditions. The scenario has compelled buyers and sellers to put in extra effort in gauging the performance of the real estate sector before making any investments in the market. It would be true to say that the real estate industry has been put in a spot because of multiple aspects at play. 

Why the real estate conditions are worsening in Australia…

The constant rise in interest rates has been the prime reason for the high magnitude of fall in the real estate sector.

This year, Australia is registering the fastest series of hikes in interest rates ever since 1994. Recently, the Reserve Bank of Australia increased its cash rate to 1.85%, marking a surge of 50 basis points. Since the month of May, there has been a rise of around 175 basis points. The rising interest rate has dented the Australian real estate sector, causing adverse effects on property prices as well as the volume of dwelling investments. It has yet again shaken the confidence of common men in making investments in real estate.

Image Source: © Michaeljayberlin | Megapixl.com

Inflation has been another major factor responsible for disrupting the real estate sector in Australia. After the early 1990s, it’s now that the country is living through times of the highest inflation.

Inflation was recorded at 6.1% over the year to the last quarter ended 30 June 2022. The Reserve Bank of Australia (RBA) believes that it is most likely that inflation will advance further in the later part of the year. However, it is expected that inflation will drop down to 2% or 3% after the peak.

The see-saw trend has been a result of several global as well as domestic factors, such as strong demand, floods, a tight labour market and capacity constraints.

Overall, the real estate market has been moving at a slower pace of late because of larger-than-expected falls in property prices. The situation has been the worst in Sydney and Melbourne for some months now as these cities are witnessing the largest declines in housing prices.

Can a resilient economy haul up the real estate market?

The RBA has stated that the national economy stood sturdy to overpower the damage caused due to Omicron outbreaks and floods on the east coast. The country showed resilience during the first half of the year. As per the forecast, the Gross Domestic Product is expected to increase 3¼% in 2022. However, GDP may experience a slower growth of 1¾% in coming two years.  

As per the RBA, factors like declining property prices, rising interest rates, and higher cost of living are likely to weigh on growth in spending at the same time as growth in public demand slows.

Also, the outlook for dwelling investments and commitments for housing loans are softer, owing to higher interest rates, high construction costs, and declining housing prices.

Moreover, the June quarter saw a 4.3% increase in building material prices, which grew by 17.3% over the year.

A quick look at three ASX-listed real estate stocks

While volatility continues in the real estate market, there are a few companies listed on the Australian Securities Exchange (ASX) that have managed to grow amid challenges during the year.

Let’s dig into some details about three such ASX-listed players from the real estate sector. 

ASX, as of 19 August 2022

Goodman Group (ASX:GMG)

A specialist global industrial property group, Goodman, is engaged in the development and management of high-quality sustainable properties. It also offers an essential infrastructure for the digital economy. The ASX-listed firm runs across key consumer markets located in 14 countries across Asia-Pacific, Europe, and the Americas.

For the full year ended 30 June 2022, Goodman Group clocked an operating profit of AU$1,528 million, up 25% on FY21. The company recorded an operating earnings per security (EPS) of 81.3 cents, up 24% on the previous year, while its statutory profit stood at AU$3,414 million.

Mirvac Group (ASX:MGR)

Mirvac Group has evolved into one of the prominent property owners and managers in Australia. The firm hosts some of the globally recognised assets in the country.

Mirvac has been successful in winning more than 700 awards since its foundation year 1972. Owing to its booming purchasing power, the group is targeting AU$100 million in social procurement by 2030.

Mirvac is in a strong capital position presently as revaluations of investment property brought in a raise of about AU$348 million for the full year ended 30 June 2022. Also, the group managed to register an operating profit of more than AU$596 million in FY22, which represents an 8% increase on the preceding year.  

Charter Hall Group (ASX:CHC)

Charter Hall Group has grown to be one of the top-rank companies for fully integrated property investments and funds management. The firm utilises its expertise in real estate to access, deploy, manage, and invest equity across the property sector, be it retail, office, industrial & logistics or social infrastructure.

The group owns a diversified portfolio worth AU$7.1 billion. In the fiscal year 2022, it posted a statutory profit of about AU$911.9 million, up 47.5 on the previous corresponding period (pcp). Also, there was a surge of ~32.4% in FY22 net property income due to a 3.4% rental growth. It registered a 38.3% asset growth following successful acquisitions in FY22 and an uplift of AU$670 million in the net property valuation.