Most importantly, the housing sector and credit growth is trending the wrong way. Falling house prices have a negative impact on households’ perception of their own wealth. Record leverage also has a negative impact on the capacity to spend more, and slowing housing activity – construction and renovations – has a negative impact on the incomes earned by tradies and contractors.
In the background is the Australian and NZ data, released by South African-listed Steinhoff, which owns Freedom Furniture, Snooze and Plush furniture stores in Australia. Excluding the more recently acquired Fantastic Furniture business, same store sales growth of minus 6% was delivered in the six months to March. In the March quarter, it is estimated sales fell by just over 9%.
Investor drop off
Credit conditions appear to be tightening. The value of all home loans (excluding refinancing) fell by 1.2% in June18, compared to the month prior, and fell by 8.4% compared to the year prior. It was the largest fall since April 2016. Investors have been the single biggest reason for the weakness, with loans to investors falling 18.1% year-on-year.
Housing ‘activity’ (sales) is also falling, with new and established home sales falling nearly 10%, compared to the same period last year, and to almost the lowest level in the last two decades.
Interestingly, the tightening of credit conditions and falling home prices and sales is only now beginning to impact loan demand for renovations and additions. Owner-occupier loans for alterations and additions collapsed by approximately 20%.
We note (according to APRA data) major banks wrote over $32 billion of interest only loans in the quarter to March 2017. In the quarter ending March 2018, the same banks wrote just $13.6 billion in interest only loans. The corresponding numbers for Investment loans were $31 billion and $26 billion respectively.
Importantly, this data indicates that the renovation cycle can reasonably be expected to turn down now. Credit tightening will continue to reduce demand for (and supply of) loans, and falling house prices will reduce the incentive to renovate and ‘flip’ properties by investors, and to ‘do up’ properties by owner occupiers.
Here are three furniture retailers to take a look at:
- Nick Scali (ASX:NCK)
Nick Scali is expected to expand into bedroom furniture, adding incremental revenue, but the company’s earnings guidance implies low-single digit negative same stores sales growth. While Nick Scali’s name is being bandied about as the imminent acquirer of Steinhoff Asia Pacific’s Freedom Furniture business, the share price has traded sideways for more than a year and acquisitive growth is rarely as appealing as organic growth.
- Harvey Norman (ASX:HVN)
Since 1982, Harvey Norman has not only been selling appliances, electronics and furniture, but has also been banking land in areas ripe for urban consolidation. When land values and the potential for rezoning is considered, investors might be buying the retail businesses for very little. We don’t believe, however, the property and retail businesses can be separated easily and that leaves investors tied to the credit cycle, which is deteriorating. One interesting possibility is that Gerry Harvey, being the largest shareholder, might be incentivized to pay a large special dividend, if Labor were elected and reformed franking credits.
- Temple & Webster (ASX:TPW)
TPW is Australia’s largest online only furniture and homewares retailer with over 130,000 products on sale from over 700 suppliers and includes the Milan Direct brand. Sound familiar? The share price of this online seller of homewares has tripled in a year, ahead of delivering its first profitable quarter ending 30 June 2018 with fourth quarter EBITDA of about $500,000. The company has a market capitalisation of $82 million. According to Thomson Reuters, only one analyst covers the company and they are expecting TPW to deliver a maiden annual profit in FY19 of $1.74 million. As small local websites become more successful, their products hit the radar of Amazon, which offers the same, similar or knockoff products for a lower price.
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