Pete Wargent blogspot

CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Wednesday, 20 January 2016

Building boom approaching its peak

Building activity at record high

The ABS released its Building Activity data today, which showed another strong result and more than $24 billion of building work done for the third quarter of 2015.

Most unhelpfully, non-residential building was actually down by -3.7 per cent over the year, but new residential building (+12.9 per cent) and alterations and additions (+5.0 per cent) increased very strongly to a record level.

However, the residential building boom does appear to be reaching the limits of its capabilities, and declines are to be expected later in 2016.

In annualised terms the big winners from all building boom and its associated multipier effect have been Victoria ($27 billion), New South Wales (+27 billion), Queensland ($17 billion), and Western Australia ($14 billion).

Capital cities have benefited greatly from construction employment and the additional economic activity generated as mining construction declines in the resources regions.

The numbers of houses and units commenced and completed in each state I will look at in more detail a separate post, but suffice to say here that many of the record high approvals will never make it to the construction phase. 

Stocks tumble to 2.5 year lows

The stock market rout continues apace, with the ASX 200 (XJO) down yet again by 61.6 points or 1.26 per cent, thereby completing 12 days out of 14 in the red.

"XJO 6000" looks a long way off now at 4,841.5, a fresh 2.5 year low.

BHP Billiton (BHP) is now trading at close to a decade low price at $14.21, with an implied dividend yield of 11.8 per cent, though of course the market is pricing a fair chance that the dividend will be cut. 

Barclays still sees huge downside for BHP even at these prices (upside $14.70, downside $6.30), and on a P/E multiple basis BHP remains on of the most expensive miners in the market. 

The implied yield curve for cash rate futures is pricing in at least one more interest rate cut, with somewhere in the middle of 2016 looking a likely bet.