Building industry: More pain ahead

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Housing looks like having another down year, after a survey of 400 builders and contractors by the Master Builders Australia (MBA).

According to the survey, conditions in the building and construction industry have worsened since 2011, despite having 175 basis points cut from the official cash rate by the Reserve Bank of Australia (RBA), over that time. Builders are set to shed jobs, amidst falling sales and profitability.

MBA’s chief economist, Peter Jones, has said, Interest rate cuts over the past year appear to have failed to boost the confidence of new home buyers”. He added that the most disturbing finding was that builder’s profits are declining as the pipeline of work dwindles, and the numbers show builders need greater support from the RBA.

The survey’s index that measures business activity fell again in the December quarter from 47.4 to 45.2. A fall under 50 indicates a decline in activity over the quarter. The index has continued to fall over the past two years, and is now below levels reached during the global financial crisis.

This follows on from weak housing approvals in November, and analysts have suggested the RBA may have to cut interest rates further, if it wants the building industry to help boost the non-mining sectors of the economy.

Potentially contradicting the MBA survey, a recent Housing Industry Association report shows sales of new homes rose 4.7% in November, its second consecutive rise, although still 16% lower than in 2011.

For residential property developers such as Stockland Group (SGP.AX), Mirvac Group (MGR.AX), Australand Property Group (ALZ.AX) and AV Jennings (AVJ.AX), as well as building materials and fittings suppliers, the news does not bode well. Many have been struggling for some time now, and could have expected the slew of interest rate cuts since 2011 to have had some positive effect.

Foolish takeaway

We could yet see the RBA forced to cut rates further in 2013 – the alternative is likely more job cuts and building and construction companies going to the wall.
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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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