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Australia's housing-related stocks have been crumbling on concerns the country's property boom has peaked, but according to Goldman Sachs, the equity market is painting a far gloomier outcome than is likely to materialize.
"Since February, stocks in our screen of companies with the most leverage to Australian housing have fallen by an average of 17 percent, underperforming the average stock in the ASX 100 by 12 percent," Goldman Sachs wrote in a note. These stocks include mortgage broker Mortgage Choice, building materials manufacturer CSR and housing developer Lend Lease.
The sell-off has been fueled by a host of factors including cooling house price growth, rising vacancy rates and market concerns that tighter Chinese capital controls following the devaluation of its currency could lead to settlement risks in the apartment market.
Mainland investors are important players in the Australian property market. Chinese investment in residential property totaled 8.7 billion Australian dollars in the year through June 2014, according to Credit Suisse, up by more than 60 percent on-year.
"While we have been highlighting these downside risks increasingly over the past year, we do not believe house prices are going to fall materially from here nor do we believe that activity in the housing market is going to fall away sharply," Goldman said.
The bank expects additional rate cuts by the Reserve Bank of Australia in November and March will help to stabilize the market and allow it to cool gradually.
As such, Goldman believes there may be some opportunities to be tapped in housing-related names.
"The risk-return in housing exposed names is now looking more balanced, in our view," the bank said.
"While we still see greater downside risk to consensus earnings across housing-related names, we believe the market is now more appropriately factoring this risk in, with most names trading at discounts to mid-cycle multiples."
Stocks that are trading at the largest discount to historical price-to-earnings ratios are CSR, Mortgage Choice, Genworth Mortgage, Lend Lease and Australia and New Zealand Banking Group (ANZ), the bank said.