The third-quarter update from Commonwealth Bank of Australia (ASX: CBA) forecasts a fall in the Australian house price index, a proxy for house prices, from between 11% to a worst-case scenario of 32%.
In line with this, REA Group Ltd (ASX: REA) reported a 33% slide in residential listings during April. The REA result is slightly misleading. It reports on a period when people were not allowed to leave their houses.
Nonetheless, these 2 figures, combined with a similar National Australia Bank Ltd (ASX: NAB) forecast, paint a bleak picture of the short to medium-term real estate market.
A dip in house prices will reverberate throughout the economy. Companies operating in the construction, insurance, and mortgage sectors will feel the impact. However, some companies are likely to see a lesser impact than others.
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Direct exposure to a fall in house prices
ASX real estate investment trusts and companies dedicated to developing residential housing have the most direct exposure. According to its 2019 portfolio report, Stockland Corporation Ltd (ASX: SGP) has a development pipeline of 76,000 lots of residential real estate. The company estimates this has an end market value of $21.4 billion. A financial impact on this company is inevitable in the case of a fall in house prices.
The Boral Limited (ASX: BLD) share price fell by 10.6% last week. On 15 May, Boral reported concrete volumes were down ~16% and revenue down ~6% for the 4 months ending April 2020, compared with the prior corresponding period.
One ASX share I believe is likely to be less impacted than others is the REA Group share price. When the economy resumes, its previous activity real estate listings are likely to remain constant or slightly lower.
It is likely developers will want to move existing inventory as quickly as possible to limit their losses. As any recession drags on, of course, retail listings become a way for people to downsize and survive in a turbulent market. So while REA too will feel the impact, I believe it will escape the worst of any market downturn.
Financiers and insurers
The KPMG 2019 report on the mortgage market reports the big 4 banks as holding 81% of the total mortgage market. As CBA is the nation's largest mortgage holder, it will be the most exposed to a fall in house prices.
However, long-suffering investors in Westpac Banking Corp (ASX: WBC), of which I am one, will also see a hit to revenues. The company launched a $2,000 rebate last year. In January, Canstar reported that Westpac had deliberately positioned itself in the lowest priced 10 loans in the market in all fixed investment loan categories. In any other year, this would have been a canny loss-leading strategy. Alas, 2020 is not any other year.
Foolish takeaway
It is very easy to get wrapped up in the moment. However, I believe all of the companies mentioned here are good companies with good management teams in place. They are likely to see lower share prices in the near term until the actual scale of any fall in house prices is known.
This may be a good time to "buy the dip" as they say. Only you may need to be patient before the turnaround comes.
