But the biggest source of pain is the group’s residential division, where Mirvac sells lots in master planned communities (houses and townhouses) and apartments.
Earnings before interest and tax in this division fell 60 per ent to $36 million. While the prior year’s earnings were boosted by government home building incentives, and Mirvac had fewer projects in the market during the period, there’s no question rising rates have hit buyer sentiment, particularly among first home buyers.
The group exchanged 845 lots in the half, down from 1814 a year earlier, as nine consecutive rate rises forced younger buyers to reconsider what they could realistically manage.
Mirvac’s settlements of 807 lots in the December half was down substantially on last year’s settlements figure of 1303. Lloyd-Hurwitz blamed this on a combination of wet weather and supply chain issues, particularly labour constraints, and is sticking with her guidance for more than 2500 lots, with a big push on settlements in the June quarter.
Pressure on home buyers unlikely to ease
If there was one bright note, it was that the residential portfolio saw no defaults during the period, with its overall default rate remaining low at 3.2 per cent.
None of this softness in the residential business is particularly surprising. Indeed, it’s exactly the caution that the Reserve Bank wants to see among consumers.
But with rates likely to continue to rise in the coming months – at least twice, according to most economists, and possibly three times, potentially taking the cash rate above 4.1 per cent – the pressure on first home buyers is unlikely to relent in the short term.
Lloyd-Hurwitz isn’t blind to a long list of challenges, including ongoing supply chain constraints, persistent labour constraints, elevated cost levels and rising rates, but she and residential boss Stuart Penklis pointed to a rise in residential pre-sales of $100 million from June 30 to $1.7 billion as a sign of underlying demand and set out of a contrarian – even bullish – case for a pick-up in home sales.
While the RBA is likely to be done raising rates by the middle of the year, and unemployment close to 50-year lows, Mirvac expects sentiment from prospective buyers should improve. The acceleration of population growth as immigration kicks back in over the course of 2023 should further help demand.
But the biggest factor in the Mirvac bull case is the Australian sector’s eternal problem: undersupply.
Rental vacancies under 2 per cent (and closer to 1 per cent in many areas) and rental growth of around 10 per cent is perhaps the most obvious sign of this supply problem.
But Mirvac argues undersupply is even more acute in apartments, where pressure on private developers has seen an increasing number of projects pulled from the market. On numbers from BIS Oxford Economics, forecast apartment completions between the 2024 and 2027 financial years is likely to be 50 per cent lower than 2017-18 levels.
Penklis also sees the widening differential between detached houses and apartments – currently about 30 per cent above historical levels, according to CoreLogic – could also attract buyers whose borrowing capacity has been crimped by higher rates. Mirvac has almost 760 apartment lots it could launch into the market in the next 12 months.
Mirvac sees the potential for the residential market to shift in the next 12 months as rates peak. That seems optimistic given the lagged impact of rate rises and the potential for unemployment to tick up, but Lloyd-Hurwitz is right when she says Mirvac can think long-term about how and when it deploys capital into projects right across its business.
That the group is strong enough and diversified enough to do this is a tribute to her time in charge.