Citi says Harvey Norman will be hit hardest in the housing downturn

Harvey Norman will be the most vulnerable of the ASX listed retailers to the housing downturn, Citi analysts Bryan Raymond and Craig Woolford have told clients.

It came in a 38-page report ranking the retailers the broker considers most exposed to a fall in house prices.The analysts point out that the housing cycle had already turned, but this is yet to be reflected in retailer share prices.

According to the broker, Harvey Norman and Wesfarmers are most exposed, with 39 per cent of Harvey Norman's group earnings driven by furniture and appliances and 40 per cent of Wesfarmers' earnings from hardware chain Bunnings.Metcash and JB Hi-Fi were high up the list, with 25 per cent of the wholesaler group's earnings from hardware businesses Mitre10 and Home Timber and Hardware.

About 18 per cent of JB Hi-Fi's earnings are in whitegoods following its Good Guys acquisition.

But Harvey was quick to denounce the report.

"I've been doing this for 50-odd years, and I've had this question only asked 20 to 30 times.

"There's not a lot of validity to it," Mr Harvey said, adding he tended not to read any broker reports, this one included.

"When the housing prices do go down a bit – and I don't know how much they are going to go down, my view is it will be very minimal – the population is still increasing at the moment by 300,000 a year. I'd much rather that than property prices go up and there's no extra people."
Citi estimates that for every 1 per cent move in house prices, Harvey Norman's sales, earnings and share price increase by 4 per cent and Nick Scali by 6 per cent.

The broker says that hardware retailers are more protected than furniture retailers.

The broader market has a 1.8 per cent rise for every 1 per cent increase in housing prices, the broker said.

The broker considered the impact of the housing downturn in 2011 and 2012 on Harvey Norman's share price, suggesting it triggered an earnings fall, price earnings de-rating and share price decline. It suggested it was among the retailers that experienced significant average sale price declines in the television category.

Harvey said there was "no proof" that television sales were linked to housing prices.

"It's tied to technology a lot more than it is to housing downturns," he said. "That just shows people don't understand the industry."Citi has a "sell" recommendation on Harvey Norman.It values the company currency trading at $3.52 at $3.12 a share. The broker also argues that as Harvey Norman owns some 95 of its 195 Australian sites, that rental income could come under pressure.