Builders struggle as house prices rise

Developers resorting to discounts, gift cards and other incentives to entice buyers, despite rising house prices

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published February 5, 2013 12:54 pm AEDT

Average home prices are now 2.1% higher compared to a year, according to the Australian Bureau of Statistics (ABS).

So much for the bursting of the housing bubble predicted by many.

Capital city house prices rose by more than analysts had expected in the December quarter, with data showing the weighted average house prices across Australia's eight capital cities rose 1.6% in the three months to December. Hobart was the only capital where house prices lost ground during the quarter.

The rise in prices is despite dwelling approvals unexpectedly falling 4.4% in December, suggesting that higher house prices are not yet leading to new home construction, but that may come in the next quarter or so.

Meanwhile, Bloomberg is reporting that Australian home builders are resorting to discounts, gift card and paying mortgage payments to entice buyers.

Australia's largest residential developer, Stockland (ASX: SGP) is giving rebates and gift cards of as much as $30,000 in the eastern states, while Devine Limited (ASX: DVN) is matching deposits in South Australia and taking over the first year's mortgage payments in Melbourne.

It seems the RBA's rate cuts of 175 basis points since 2011, and state government efforts to stimulate demand, have failed to ignite the property sector, amid slowing job growth. Stuart Cartledge, managing director of Melbourne-based Phoenix Portfolios said "Affordability based on mortgage costs has improved, but people are worried about losing their jobs. House buyer confidence isn't there."

Analysts have suggested Stockland, Peet Limited (ASX: PPC), Australand Property Group (ASX: ALZ) and Mirvac Group (ASX: MGR) could report negative earnings surprises, with property developers saying they are facing the worst conditions in 20 years and expect little change in 2013.

The Foolish bottom line

Industry group Master Builders Association recently stated that the building industry was unlikely to see a reversal of this downturn any time soon. The property industry looks like having another tough year ahead.

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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

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