Next Tuesday we get the May house price report for Australia from CoreLogic and you can bet there will be more said (and warnings issued) about price rises.
Australian prices are high and heading higher for the moment.
But if we think Australian prices are soaring – and they are – take a look at the US where they are now surging at the fastest rate in 15 years and along with the rapid rise in raw material costs, the pressures are starting to hurt new home construction and demand.
Like Australia, new home construction is a major investment driver and employer and while we saw a slight cooling in new private dwelling approvals and starts in March, the federal government’s HomeBuilder scheme has injected sufficient demand via its start-up subsidies to keep construction happening well into 2022, though at a slowing rate.
The CoreLogic start of month report showed a 7.8% rise in Australian house prices over the past year which saw doom and gloom fears from analysts and commentators. Some of the concern, especially on equity and access to housing for young buyers – is warranted.
But in the US the surge continues unabated at a much higher level than in Australia and its impact, along with rising raw material costs, is spilling over into new home construction which is tanking.
The latest monthly report from the S&P CoreLogic Case-Shiller National Home Price Index showed US house prices rising 13.2% in March from a year ago.
That’s up from a 12.2% rise in February and 10.4% over 2020. It was the 10th successive month of price rises for US houses. Stimulus spending from the US and state governments has helped, but it’s the cheap (up to now) cost money from the Fed and government) that are the drivers.
Now these factors seem to be running out of puff, leaving behind still rising prices, a shortage of new homes and building sites and rapidly rising raw material costs.
And the impact of the Covid pandemic and lockdowns wasn’t a major factor in April with a weak comparative base a year ago as prices rose 4.4% in the year to March 2020, up from 4.2% in February.
Total mortgage application volume fell 4.2% last week from the previous week, according to the Mortgage Bankers Association’s (MBA) seasonally adjusted index.
Refinance demand fell 7% for the week and was 9% lower than a year ago. US analysts say that so many borrowers have already refinanced at rates below 3% that there is just not a lot of opportunity left with rates rising.
The refinance share of mortgage activity decreased to 61.4% of total applications from 63.3% the previous week. Mortgage applications to purchase a home increased 2% for the week but were 4% lower than a year ago.
Joel Kan, an MBA economist, said “Demand is robust throughout the country, but homebuyers continue to be held back by the lack of homes for sale and rapidly increasing home prices.”
The March 2021 rise in the Case Schiller index was in fact the largest since December 2005 and is also one of the largest in the index’s 30-year history.
Prices are being pushed higher by incredibly strong competition in the market. High demand is running into near record-low supply, resulting in bidding wars for the vast majority of listings.
And like Australia there is a definite trend of bigger prices rises in smaller cities outside the major areas of New York, LA, Chicago and Florida. For example the survey showed prices in Phoenix in Arizona up 20% over the year to March, Seattle prices are up 18.1% and San Diego prices more than 19%, according to the survey.
“These data are consistent with the hypothesis that Covid has encouraged potential buyers to move from urban apartments to suburban homes,” according to Craig Lazzara, managing director and global head of index investment strategy at S&P DJI.
And US home loan (mortgage) rates are now much higher than they are in Australia at 3% or more. That rise hasn’t impacted demand – the big factor is a shortage of properties.
America’s National Association of Realtors says only 1.16 million homes were on the market in April, a 20% drop year in the 12 months.
While a lot of Americans feel confident (in the wake of the pandemic) to buy a house, more seem to be unwilling to sell, or feel no need to. Job insecurity is a factor from anecdotal accounts.
And a country famous for the mobility of its people, is no longer as willing to up sticks and move across the country for a new job.
US analysts say the shortage of homes, especially at the lower end of the market, means house prices will not cool any time soon.
And adding to the pressures is a sharp drop in new home starts across the US in April. The 13% drop was the biggest since April 2020 when Covid lockdowns shut down construction.
Economists say price rises for bricks/timber/metal products/appliances/carpets/electrical services using copper products for plumbing are a major factor and triggering a downturn in starts.
US houses use more timber (lumber) in house construction than is used in Australia and the US National Association of Home Builders (NHAB) says a broad mix of residential construction materials is up in aggregate 12.4% in the past 12 months, according to the producer price index for April.
The NAHB estimates that the increase in lumber alone has added $US36,000 to the cost of building the average single-family home in the past year.
The surge this year in timber prices in the US peaked on May 10 at more than $US1,700 per thousand board feet (for four by twos typically used in rafters and frames). It has fallen to around $US1,450 on Monday of this week. But the usual price range is $US300 to $US500, so the inflation is still considerable.
The NAHB says the rapid rise in costs (even though most contracts have price escalation clauses) has seen buyers drop out of contracts, builders lay slabs to get a house started, but then unable to finalise contracts because of price rises for timber etc.
CNBC reported on Tuesday, “Builders are also reporting difficulty obtaining other inputs like appliances,” said Mike Fratantoni, chief economist for the Mortgage Bankers Association. “These supply-chain constraints are holding back a housing market that should otherwise be picking up speed, given the strong demand for buying fuelled by an improving job market and low mortgage rates.”
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So what’s this mean for Australian companies in the US?
Well, James Hardie is a major player in sectors of the US home building industry (it’s forecasting a record result for 2021-22 but given the slide in new starts, you have to wonder how long before Hardie starts feeling the pressures).
Boral still has some involvement in US building activity but it has been cut by asset sales in the past year.
Plumbing supplies group, RWC is big in the US sunbelt region and again you have to wonder how long before it starts warning of cost pressures and weakening demand – even though its latest trading update was bullish and it did focus on rising prices.
In its late April update, RWC did mention rising costs, saying: “RWC is continuing to implement price rises for products which have seen sustained input cost increases, particularly brass products which have been impacted by higher copper and zinc costs. We continue to expect to be able to pass on the impact of metal commodity and other cost increases through price adjustments.
Melbourne-based Reece is in US home building with its range of bathroom and plumbing products and the same remarks about RWC and Hardie apply to it.
REA and its 61% owner, News Corp are involved in the US home buying sector through Move, which owns Realtor.com. (REA has 20% of Move, News the other 80%). Realtor is the second largest digital listings/property website in the US after Zillow.
The bidding wars should help both, but at some stage the shortage of available houses will impact listing fee and other sources of income.
Sydney investors in a private funds group called Caledonia own around 25% of Zillow, so they have a vested interest in the current state of the US housing sector.
BlueScope Steel has its big North Star steel plant and mill in Ohio and is making a motza from the boom in steel prices in the US midwest. BlueScope concentrates on coil (for cars, appliances, roofing etc). It also has a construction products arm that supplies non-housing businesses.
