Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Property slowdown may cap earnings for building suppliers

Nicki Bourlioufas  |  12 Oct 2018Text size  Decrease  Increase  |  
Email to Friend

Australia's property market is slowing down and building approvals have plummeted in recent months as developers pull out of the market, reducing demand for building materials.

While some companies' earnings will be hurt by the downturn, the impact may not be as great on the big banks who largely lend for the purchase of established homes.

Recent data from the Australian Bureau of Statistics reveal that in seasonally adjusted terms, total dwellings approved fell by 9.4 per cent in August, driven by a 17.2 per cent decrease in private dwellings excluding houses. Private houses fell 1.9 per cent in seasonally adjusted terms.

The value of total building approved fell 1.3 per cent in August, in trend terms, and has fallen for nine straight months.

While much commentary has focused on the downturn, National Australia Bank economist Ivan Colhoun said in a recent research note that while the Australian housing market is undergoing a correction in both price and activity, "this correction remains moderate at this stage."

housing property article building supplies lending

A housing slowdown could hurts bank earnings

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Morningstar head of Australian banking research David Ellis says there may only be minimal effects on banks' loan growth from the slowing housing construction cycle.

"A 'housing slowdown' could hurt bank earnings depending on how sharp and deep it is and how long it lasts. If housing credit growth slows from current rates around 5.5 per cent to say 4 per cent, then there would not be much impact on bank earnings as the banks will cut expenses to partially compensate for lower net interest income growth," says Elllis.

"A modest slowdown in credit growth and an orderly fall in average house prices of approximately 10 per cent over the next 12 to 24 months will not hurt bank earnings much.

"However, if we have a sharp and prolonged reduction in credit growth (extending to negative credit growth), a credit crunch and sharply lower house prices, then the risk of a recession increases. Banks are leveraged financial institutions and bank earnings would suffer in recessionary conditions," says Ellis.

A slowdown in the housing construction cycle from current elevated levels largely affects lending for new dwellings rather than established homes' Ellis adds.

As a result, some building materials companies like Brickworks (ASX: BKW) and CSR (ASX: CSR) will be affected. Morningstar analyst Grant Slade says following the cyclical peak of building product earnings in fiscal 2018, he expects demand for bricks to soften, with total housing completions to fall roughly 5.5 per cent to 186 million in fiscal 2019 and a further 6.8 per cent in fiscal 2020 to 174 million.

"We expect a 5 per cent loss of market share for Brickworks over the five-year forecast period, revised from a prior expectation of no market share loss, to augment the cyclical downturn effect," says Slade.

Slade has a fair value on Brickworks of $15.30, which is below its current price of around $16.99 at the time of writing.

"Looking forward and past the peak in the construction cycle, we expect earnings before interest and taxes (EBIT) margins to fall and average 6.7 per cent over the coming five-year forecast period," says Slade.

Morningstar analyst Adam Fleck, who analyses CSR, says the company will face a drop in earnings from its building products business because of the housing downturn. He puts a fair value of $4.10 on the stock, suggesting it is undervalued at its current level of $3.64.

"We expect earnings in building products to remain steady in fiscal 2019 before dropping off from 2020 as lower construction activity affects sales and negative operating leverage weighs on margins, underpinning our forecast of a negative 2.4 per cent compound annual growth rate in operating earnings over the five years to 2020 (there is a delay between housing completions and approvals)," says Fleck.

"We remain cautious about the medium-term prospects for residential construction. Our outlook is based on our view that the relationship between population growth and new home construction will return to a long-term average, versus the elevated level the country has seen recently. But we already incorporate a near-term dip in our projections for CSR in 2019 and 2020."

But CSR will also benefit from a stronger US housing market. "We're optimistic about US housing, however," says Fleck. "While we've recently tempered our near-term outlook, we still see several more years of solid residential construction ahead, driven by the large and aging millennial population, continued job and wage growth, and an increased supply of entry-level homes."

 

More from Morningstar

7 costly myths of sustainable investing

ANZ boss appalled at bank's impact

Make better investment decisions with Morningstar Premium | Free 4-week trial

 

 

Nicki Bourlioufas is a contributor for Morningstar Australia.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a Morningstar contributor.

This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. 

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend