When it comes to a conversation about Australian property prices, the spotlight turns to how housing prices are declining. What we largely forget are the companies behind the rapid growth of the housing market and what the end of the housing boom means for them.
3 ASX-listed building companies that could be affected
CSR Limited (ASX: CSR) manufactures and supplies building products in Australia and New Zealand. The CSR Limited share price is up 1.9% to $3.21 at the time of writing, but down over 33% in a year.
Boral Limited (ASX: BLD) is an international building and construction materials company. The Boral Limited share price is likewise, down over 34% since February last year.
James Hardie Industries plc (ASX: JHX) is a manufacturer of fibre and cement siding and backer board. The James Hardie share price is up 1.62% to $17.53, but down 23% in a year.
How do falling house prices impact on these ASX building shares?
The financial performance and share price of all three companies are heavily correlated with the Australian House Price Index. For example, the last time the Australian property market experienced a significant slowdown was in late 2015 to early 2016. During this period, the CSR share price experienced a peak to trough drawdown of 43%.
The housing market is showing no signs of plateauing the price decline. In fact, house prices in Sydney have just recorded their sharpest downturn in more than two decades, falling by more than 10% in the past 12 months.
Many economists believe that the worst is yet to come. The Reserve Bank has identified this as a "significant area of uncertainty" and downgraded its economic growth forecast.
A closer indicator for these construction companies is the "Performance of Construction Index" (PCI). The most recent PCI commentary for January 2019 cited "further weakening in the house and apartment building sectors where rates of decline in activity and new orders were the most marked in over six years". Other areas of concerns include cost pressures in elevated energy prices and supplier prices due to higher commodity prices.
What now?
The housing market is highly cyclical in nature, and, in my view, right now is certainly not the time to be in construction-related businesses.
Companies like CSR and Boral both have earnings that are heavily skewed towards the Australian market. This significantly increases their risk should property markets continue the downward trend.
Foolish Takeaway
While these companies are looking cheap at the moment, this does not mean that investors should be rushing to buy them.
There will come a time when the property markets turn a new leaf, but that time is certainly not now.
If investors want exposure to construction, Cimic Group Ltd (ASX: CIM) is a quality construction company that is not involved in the housing market, but rather large infrastructure projects.
