Home building recovery not until 2021: JP Morgan

Australia’s ailing home building sector isn’t expected to bounce back for another two years, JP Morgan warns.

Housing starts have fallen short of expectations in 2019.

The number of new housing starts in Australia could fall by as much as 18 per cent in 2019, with a recovery not expected until 2021, according to JP Morgan analyst Brook Campbell-Crawford.

After a 26 per cent fall in housing starts for the March quarter compared to the prior year, Mr Campbell-Crawford estimated that house starts would fall 18 per cent this year and a further 3 per cent next year, as the building materials sector battles low approval volumes as well as weak lead indicators.

“Housing starts have fallen short of our expectations in 2019 to date across both Australia and the US,” he said in a note to clients.

“Forward-looking approvals data have deteriorated sharply in the year-to-date and commencements data is starting to reflect a similar dynamic.”

Mr Campbell-Crawford said the prices for all stock in its building materials coverage had underperformed the ASX 200 and were down on this time last year, with the exception of Dulux.

Cement maker Adelaide Brighton was estimated to have about 55 per cent exposure to Australia’s flailing residential construction sector, while CSR was about 32 per cent exposed, JP Morgan said.

However, stronger than expected activity in New Zealand could help Fletcher Building, which is 28 per cent exposed to the country’s residential sector.

“Housing consents (in NZ) have moved solidly higher in 2019 to date, a better outcome compared to our expectations set at the beginning of the year,” Mr Campbell-Crawford said.

“We expect a broadly flat outcome for the balance of 2019 and slight decline in 2020.”

Still, JP Morgan favoured James Hardie and Reliance Worldwide in the building materials sector, saying that they see “significant valuation support” and that earnings growth would be “considerable” in the coming years.

“The growth outlook for both companies is strong, in our view,” Mr Campbell-Crawford said.

“We continue to see valuation support for Boral, but a softer domestic market will partly offset growth in the US over the coming years.”

JP Morgan estimated that James Hardie is 29 per cent exposed to the US residential construction market, while Boral has 17 per cent exposure to that market.

While US housing starts have also undershot expectations for 2019, Mr Campbell-Crawford said modest growth from June is expected on improvements in mortgage rates and application volumes.