Significant household investment decisions depend on confidence, or ‘animal spirits’, which are clearly emerging in the USA. As per history, this confidence will manifest in households making high-value purchases – particularly new residential housing. While market analysts are expecting construction of new US housing to take four years to grow from current levels of 1.2 million per annum to the long-term average of 1.5 million per annum, this forecast seems too conservative. We provide evidence of the pent-up demand for housing and then describe why the conditions exist for this potential demand to translate into actual demand that will exceed 1.5 million new houses. We then look at exposure to the recovery in the US housing market via Boral (BLD).
This is a well written article and you make a convincing case regarding the US housing recovery, although I have a question. You argue in the article that many more houses will need to be built in the US in the years ahead to compensate for the lack of house construction in recent years. Although Boral would benefit from this, my understanding is that following on from the Headwaters acquisition, over half of Boral's revenue will still be generated in Australia. Given this, do you think it is possible that Boral share price could be weighed down by concerns that there could be a severe downturn in the property market in Australia in the near future?. It could be argued that if you are optimistic about the US economy it would make more sense to look into buying a company or commodity (for example, lumber) that provides more direct exposure to the growth in US housing.
Excellent question. You are correct that BLD has significant exposure to the Australian housing construction market, which we believe will experience a typical cyclical downturn. We believe that this downturn will be offset by BLD's exposure to the non residential construction market, which is experiencing strong growth. To answer your broader question, I am sure there are more pure exposures to the US housing construction market recovery, but we have confined out investment universe to those companies listed on the ASX.
Thanks for the response Tim, much appreciated.