How to understand the change in home approvals

The building approvals data is a monthly release issued by the Australian Bureau of Statistics detailing the change in building permits (approvals) issued, and is widely viewed as a key indicator of housing demand.

The very large spike in activity over the past year has been associated with the start and subsequent finish of the HomeBuilder package, a key stimulus measure designed to support the housing market in response to COVID-19. 

Post the expiry of this program, the data has begun to normalise, which you seen in the graph above (the number of permits issued) and below (the value approved).

From a stock picking perspective, the key is to ensure you avoid paying peak multiples, which are likely capitalising peak margins, on the underlying sectors whose earnings are being driven by a strength in housing demand that is unsustainable. 

For example, this means being alert to overpaying for building materials companies, or the banks that extend the credit that underpins/follows the approvals process, on the basis of extrapolating demand, or simply assuming that it continues at broadly similar levels, when it is likely to continue to normalise. 

To our mind, there are plenty of stocks within those sectors trading at what we would regard as unsustainably high multiples, in both an absolute and relative sense, suggesting an elevated risk appetite for the earnings generated.

We are running an underweight to the building materials sector, within our direct equity portfolios, and where we do have an exposure, choosing to focus on higher quality names within the space, such as Adbri (ASX: ABC).

Never miss an insight

Enjoy this wire? Hit the ‘like’ button to let us know. Stay up to date with my content by hitting the ‘follow’ button below and you’ll be notified every time I post a wire. Not already a Livewire member? Sign up today to get free access to investment ideas and strategies from Australia’s leading investors.