June 30, 2011 – As the Australian housing market is starting to experience the struggles that the United States and Europe have already been feeling for several years now, Australia’s buildings materials sector are likewise in for a lengthy and extensive recovery which is said to be due to a large amount of mixed economic and housing data that have cause analysts to scramble to lower their housing starts forecasts.
The building materials sector is expected to brace for extended and drawn-out recovery as housing starts for the next financial year and are forecasted to be in the mid-to-high 140,000s, which is a drop of about 10 per cent.
Large building materials companies are buckling up for even sharper declines, as it places the medium-term profit expectations of analysts at risk.
This came about as housing and finance approvals are weakening resulting to home builders’ stoppage in constructing new houses as potential first time home buyers are stopping their buying activities.
According to Matthew McNee, a Goldman Sachs analyst, though weak housing and finance approvals were indicating to an imminent material decline in housing construction activity, any slump was likely to be viewed as ”relatively mild” by historical standards.
An intriguing trend in the relationship between the number of housing starts and the value of actual construction activity has been observed to have started to deviate.
Mr. McNee explains that “the apparent breakdown in this relationship is difficult to explain and clearly makes housing starts assumptions less useful when forecasting the earnings of building material stocks.”
However, Mr. McNee further expounded that despite the weak housing data, there is still a high backlog of work as well as a solid basic demand for housing which is due to above-average levels of immigration and consistently low levels of rental vacancies.
So far this year, building material stocks have underperformed the broader market, though building materials stocks were disreputably cyclical, according to Simon Thackray, a Nomura analyst.
Mr. Thackray explained that in expectation of cyclical recovery, people are ready to pay high multiples. However, when there is a delay in recovery, share prices plunge as people realize that the reason for the high price is not justifiable anymore.
