How to play the housing boom in the ASX

The Easter conversation that bounced around the walls of my parent’s house focused on property. Tom, when are you going to buy a house? Where would you like to live? Why would you buy there? Can you afford to live there? Have you been saving for a deposit? Maybe you should ask Marcus for a raise. On and on it went. ‘Living and working through the 80s, saving, then buying a property on three times your wage was a far easier conversation to have 40 years ago’ came my rebuttal. It wasn’t particularly well-received. Data from CoreLogic last week revealed that the housing market is growing at the fastest pace in 32 years. Sydney and Melbourne have both completely recovered from the downturn, the combined capitals growing 2.8% over the month in March, ahead of the 2.5% gain posted in regional cities. The slow return to work is stoking demand in the capital cities, with buying activity intensifying as supply remains constrained. The affordability of property now beyond the reach of many. One of the team members in the office has been casually looking at properties and anecdotally reports that most advertised within his area are sold prior to the first open inspection. Yikes. Sydney’s median house price is now $1,112,671, up about $50,000 since February, with Melbourne house values up $20,000 to $859,097. I’d have to get a pretty big raise if I was to sit on the same multiple as my parents when they bought their first property. Banks are falling over themselves to lend money and buyers are lining up in droves to borrow. The value of new loans jumped 48% through the year to February, according to the latest data out of the ABS. You may need to consider that last February, the world stopped revolving like it used to as the pandemic meltdown was in full swing. Whilst the market is hot now primarily due to the supply issue, it is argued that the rate of price growth in the property market is unlikely to be sustained in the medium to longer term. While over the year new loans jumped almost 50%, there was a slight contraction month to month in February, of 0.4%. This is more likely to be a blip than the start of a material trend change, but it does add weight to the argument the pace of growth is slowing. CoreLogic research director, Tim Lawless, said he’d be surprised to see the current rate of growth endure past 2021. “I think the worsening of affordability would result in fewer buyers or prospective buyers being able to participate in the market.” Even if Mr Lawless’ prediction comes to fruition, there is still a long way to go before the end of 2021 and with that, money to be made. As Henry alluded to earlier this week and, as pointed out above, this run will ease, but as we often say here at Marcus Today, there is no point finger wagging and waiting to say, ‘I told you so’. While the market is hot, go with the flow. Don’t try and predict the top, wait for it to happen and take profits then. For those who need a reminder of the power of following a market theme, the table below shows the performance over the last year of companies leveraged to the housing market. We have picked three to have a look and run through an abbreviated BUY HOLD SELL filter. For reference when looking at the table, the ASX 200 over the same period is up ~33%. REA Group (ASX: REA) - This digital advertising company specialising in property jumped ~88% over the year and delivered a net profit of $172.1m in the first half of fiscal year 2021, up 13% on the prior corresponding period. EBITDA of $290.2m represented a 9% increase that was ahead of consensus. The interim dividend of 59 cents was up 7%. We expect an increase in listing volumes on the back of an already strong and improving residential cycle. A recent Macquarie survey also highlighted REA as a preference for real estate agents nationally. Whilst it is expensive, compared to peers and to other tech names, it’s not ridiculous and it is quality. The acquisition of Mortgage Choice (MOC) should provide opportunities for synergies from greater scale and the move is likely to be immediately accretive to earnings. Our rating is BUY. Australian Finance Group (ASX: AFG) – This mortgage broking company jumped more than ~86% over the year. AFG is one of the key beneficiaries in the housing market recovery and the numbers have spoken to a clear trend in demand for mortgage brokers. AFG’s home loan lodgements were more than $1.5bn during the September and December quarter, up versus $1.1bn in the June quarter. Lodgement trends support the outlook for the group's earnings. It has an impressive fundamental picture and brokers are behind it as well. We rate AFG a HOLD. CSR Limited (ASX: CSR) – This manufacturer and building products supplier added more than 84% to its share price in the last year. An interesting point from AFG’s second quarter market release sheds some light on why it has been outperforming the broader market. 42% of AFG lodgements where for those looking to upgrade their homes, evidence of a large appetite for renovations and CSR is perfectly positioned to capture that hunger. The balance sheet is considered in great shape, benefitting from strong cash flows and capex cuts. The government’s HomeBuilder scheme has brought forward demand and building pipelines (especially detached homes) are now full, with activity expected to be elevated deep into 2022. Our rating is BUY. For more insights from Tom and the rest of the Marcus Today team, try signing up for a 14-day free trial to our newsletter - CLICK HERE to get started.