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Housing: More green shoots

More evidence has emerged that the housing and construction industry is on the road to recovery.

Construction activity has reached its strongest level since June 2010 in February, as low interest rates slowly get the sector moving. According to the Australian Industry Group/Housing Industry Association’s latest report, the construction index rose 9.4 points in February over January, to 45.6. A reading under 50 still indicates contraction, but the big jump suggests green shoots could be emerging.

The rise reflects a substantial improvement in house building activity, and a solid rebound in engineering construction. The house building sub-sector jumped a massive 15.4 points to 51.5 in February – the first expansion for this sub-sector since May 2010, and follows 32 months of consecutive decline.

Apartment and commercial construction continues to fall. The report also says that home builders have reported an increase in customer enquiries and an increase in the uptake of new work in February.

We’ve already seen home prices rise for the second consecutive month and housing affordability is at its cheapest level since 2009. Three small mortgage lenders have cut their home loan interest rates with no prompting from the Reserve Bank, and we could even see the big four banks cut their rates – but I’m not holding my breath!

For investors looking to make a play on a recovery in the housing sector, here’s some ideas for you. We might have suggested building materials companies as worth a look, but as home prices rise, people may decide it might be safer to renovate rather than move. On that basis, hardware stores such as Bunnings and Mitre 10 are likely to prosper. Bunnings is owned by Wesfarmers Limited (ASX: WES), and the underlying properties are owned and managed by BWP Trust (ASX: BWP). Mitre 10 is now wholly owned by Metcash Limited (ASX: MTS), while supermarket operator Woolworths Limited (ASX: WOW) is expanding into the DIY and hardware space through its Masters stores.

Foolish takeaway

2013 could be the year the building industry turns. After years of being in the doldrums, green shoots are emerging – good news for companies exposed to that sector.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Woolworths.

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