Bad news for physical market may be good for property stocks

Based on a medium term scenario.

It has been noted that local home prices have retreated by 1.6% over the past month, and the outlook from home buyers has started to cool.

According to a research note from Barclays, although falling home prices are negative for property stocks in the long run, in the medium term, Barclays sees a scenario where bad news for the physical market may be good news for property stocks.

As the government has always maintained that demand-side cooling measures are counter-cyclical in nature, it would follow that a confirmation of this downtrend could lead to some measures being relaxed.

Here's more from Barclays:

In this note, we look at three lessons learnt from the introduction of property cooling measures over the past six years. After applying our valuation and fundamental overlay, we believe NWD and Kerry are best positioned if and when cooling measures are relaxed.

Property cooling measures are counter-cyclical and dynamic: Over the past six years, the government has launched several rounds of property cooling measures. The government has always described demand side measures as counter-cyclical. Just as the climb in home prices led to new measures, we believe there is scope for some degree of relaxation when home prices decline. That said, with home prices down only 1.6% from the peak, it is arguably pre-mature to expect a roll-back of demand curbs.

Symmetry: Expect a mirror image reaction on the way down: Similar to the reaction of the physical market and property stocks when various cooling measures were introduced over the past six years, we expect the opposite effect when cooling measures are gradually removed.

Three lessons learnt: Looking at the reaction of property stocks to the introduction of cooling measures over the past six years, we believe there are three key lessons learnt.

A bigger impact from demand side measures: T+30 day HSP average performance following: Stamp duty increases -3.1%, mortgage tightening - 2.0%, supply side measures +0.1%.

Developers react more strongly to policy changes: T+30 days after the eight demand side measures, developers –3.6% and landlords & REITs +0.6%.

Policy desensitisation: As the market becomes more accustomed to the periodic introduction of new cooling measures, the short-term (i.e. T+1 and T+7) reaction becomes more muted. However, over the long run, increased policy uncertainty leads to widening NAV discounts.