SYDNEY, February 11 (Reuters) – Australia’s housing market pulled A $ 2 trillion ($ 1.6 trillion) economy out of its first recession in three decades with record high prices, soaring home loans and building approvals at their 19-year peak.
Among the main beneficiaries of the boom are Australia’s largest banks, which have seen a stock rally on expectations of returns and dividends in 2021.
Australian banks fell out of favor last year when the COVID-19 pandemic forced entire sectors of the economy to shut down, prompting the central bank to cut interest rates three times to a record low of 0.1% and launch an unprecedented bond-buying program.
The property market’s solid recovery since then, lower-than-expected loan deferrals and strong credit growth have sent consensus earnings expectations for banks up by 31% over the past two months, said Shane Oliver, Sydney-based head of investment at AMP. .
The extremely low interest rate environment is generally negative for bank earnings, and a flat yield curve, where the gap between short-term and long-term returns is narrow, should squeeze profits.
However, in the case of Australia, looser financing conditions and strong government stimulus have pushed lending volumes higher, more than offsetting the hit from tighter net interest margins.
Property deals surged as residents took advantage of lower borrowing costs and because remote working technology allowed people to buy larger residences from downtown.
Major lender Commonwealth Bank of Australia on Wednesday increased its dividend payout ratio to 67% after posting above-expected first-half cash profit.
The Sydney-based bank also reported a surge in household and business savings amid solid loan growth while loan holdings slipped to 25,000 on January 31 from 145,000 loans at the end of June.
“Short-term macro pulls appear to be in favor of the bank,” said Anthony Doyle, a cross-asset investment specialist at Fidelity International.
“Rising house prices, the reopening of the economy and the absence of provisions point to a sharp rise in income and dividend growth in 2021,” added Doyle.
Shares of the so-called “Big Four” banks – CBA, Westpac Banking Corp, ANZ Banking Group and National Australia Bank – have jumped between 5% and 15% since the start of the year.
In comparison, global peers such as Lloyds Banking, Citi, ING and HSBC fell or were only slightly higher.
Australia’s REA Group, which advertises property and property-related services on websites and mobile apps, is also reaping the benefits of the housing revival.
“We expect listings to grow 10% in 2021 driven by higher confidence among vendors due to strong buyer interest, low interest rates and healthy bank liquidity,” said Jefferies analyst Roger Samuel, boosting REA for “buying”.
THE FUTURE IS CHALLENGED
The housing boom, sparked by massive monetary and fiscal stimulus, is good for an economy growing at a faster-than-expected rate after the country managed to contain last year’s coronavirus outbreak.
Monetary easing and fiscal stimulus approaching A $ 300 billion have helped revive the housing market, with economists forecasting the value to rise 7-10% by 2021.
With interest rates expected to remain at 0.1% for some time and a third round of quantitative easing likely later this year, the bank’s earnings outlook remains challenging.
Although the central bank upgraded Australia’s economic outlook last week, it does not expect the unemployment rate to reach its full employment forecast and inflation is not seen hitting its target range of 2-3% through 2023.
Prime Minister Scott Morrison has signaled international borders will remain closed this year even as a vaccine has been rolled out globally, meaning population growth from migration will remain near zero.
In addition, the government has also gradually eased some of the fiscal stimulus launched after the pandemic, creating uncertainty over jobs and consumer spending.
Fidelity’s Doyle remains “underweight” on Australian banks and noted some structural obstacles.
“Underlying profits for banks will remain challenged in an environment of very low interest rates and quantitative easing,” he said. “Sufficient liquidity has resulted in intense competition within the sector, as banks seek to increase lending and gain market share.” ($ 1 = 1.2932 Australian dollars)
Reporting by Swati Pandey; Edited by Sam Holmes