Housing construction poised to fall off a cliff

The Housing Industry Association’s (HIA) dire forecasts for new housing construction make for chilling reading both for building materials companies and for the broader economy.

Housing starts in Australia had already moved into decline in the 2019 financial year but the HIA sees the COVID-19 pandemic pushing these numbers over a cliff to land down 30 per cent and with it half a million jobs.

To put this into perspective, in 2018 Australia was building more than 230,000 residential dwellings a year. If the HIA predictions come to pass this number will fall to about 111,000.

A COVID-driven crisis in construction is predicted.Credit: Erin Jonasson

"The shock to the economy from the halting of overseas migration, the absence of student arrivals and uncertainty over the domestic economy will see the national market at a lower point in December 2020 than it was during the 1990s recession," according to HIA’s regional director, David Bare.

"It will then continue to decline through 2021, even with the return of overseas students and migration."

Those companies heavily exposed to construction and in particular housing construction have so far shown relatively small impacts from COVID on their operations. Most have experienced a slow down in revenue due to the closure of some manufacturing facilities but all the major listed players have withdrawn their 2020 financial year guidance and many have sought additional liquidity from banks and scuppered their dividends.

Builders and building materials companies are in cash preservation mode, bracing for a 2021 building crash.

CSR, a major supplier of plasterboard, bricks and insulation reported March 30 year earnings that were down on the previous year but ahead of guidance. Executive bonuses have been sidelined and the share buyback put on ice.

James Hardie which specialises in plasterboard reported a solid result this week noting that in its Australian divisions volumes were flat in the six weeks to mid-May. Like CSR, predictions for future profits are off the table for now.

Boral revealed in an update last week that its margins had been significantly damaged but the COVID effect on its operations had to date not hit revenue hard. Analysts have now downgraded profit projections for the company for the 2020 and 2021 financial years and there is a growing chorus in the market anticipating Boral may have an equity issue to fortify its balance sheet.

Cement maker Adelaide Brighton’s chief executive Nick Miller told shareholders this week there was little visibility on the housing market pipeline after August or September - beyond which it was very hard to predict.

New Zealand based Fletcher Building, which has seen its New Zealand operations all but close down due to the stricter COVID measures across the Tasman, sustained a $55 million loss in NZ but managed to break-even in Australia whose operations ran at about 90 per cent over April.

But Fletcher’s chief executive Ross Taylor provided the market with a stark warning. "We expect COVID will lead to a sharp downturn in financial year 2021," he said, predicting residential approvals in Australia to fall to 129,000 in 2021.

Taylor said 10 per cent of his workforce would lose their jobs. Fletcher’s housing start expectations are not as dire as HIA’s forecasts but still represent a hefty fall from current levels. A major culprit in the anticipated decline in housing is a fall in immigration.

The Australian Treasury has provided guidance that net overseas migration in the next financial year is expected to drop to about 85 per cent below the level recorded in the 2019 financial year.

This could see Australia’s population growth rate drop to about 0.5 per cent per annum, according to the HIA.

"If Australia’s population growth rate drops to around 0.5 per cent, the implied demand for new home building will drop to around 70,000 homes per annum. This level of demand could be satisfied simply by completing the dwellings that are already under construction," it said.

How the official housing construction numbers look in April won’t be known until June. That will be one to watch out for.

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