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Home building approvals slip despite uptrend

Just last month, the Australian Bureau of Statistics (ABS) released building approvals figures for July, showing a 10.8% seasonally adjusted rise, another sign that the housing market might finally have some legs under its recovery.

Yet like the old saying, “a month does not a trend make”, August saw the data slip down 4.7% on seasonally adjusted estimates. Monthly changes can be volatile, so longer time period trends are needed to get a better view.

The same release showed the 12-month period to August to be up 10.3% for private sector houses, slightly down from the 12% increase in houses for 12 months to July. The trend is lessening, but still much better than it was.

Stockand (ASX: SGP) CEO Mark Steinert remarked that its house sales are improving, with more first home buyers entering the market, and more than half of the 5000+ lots it sells annually are being purchased by first timers. He also noted that migrants, who are classified as first home buyers generally, are adding to the increased demand. Currently, around 180,000 migrants enter Australia yearly.

The issue is whether the increase in buyers will translate into more homes being built. The established house market may take up a big portion of sales, and until either current listing stock goes low enough or median prices go high enough, not as many buyers will opt for building a new house.

This also affects building materials companies like Brickworks (ASX: BKW), which has seen a rise in share price of about 40% since September 2012 due to the fledgling housing recovery. It reported a 20% increase in brick sales and order volumes in the first six weeks of the new financial year.

If building approvals soften still, the company can pass on extra costs to its customers because of the stronger demand for materials, whereas before when the housing market was soft, it had to eat the cost to remain competitive.

That can improve the profit margins of similar companies like Fletcher Building (ASX: FBU), Boral (ASX: BLD) and CSR (ASX: CSR) until the actual volume of houses returns to long-term averages. Their share prices have increased 41.7%, 28.8% and 55.5% respectively since September 2012, indicating the stock market is pricing in a housing recovery.

Foolish takeaway

When looking at housing statistics, remember how a house is purchased. You get finance approved, then you buy it, and then apply for building approval (unless it is speculative house where the builder builds it before finding a buyer). You need to watch the three in that order to understand the flow of business coming.

The statistics are available at the ABS website, so look at multi-year figures to get a feel for what is below and above average so that you are not swayed or scared by short-term hiccups.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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