Construction expands – first time in 40 months

The construction industry is showing further signs of recovery, thanks to strong house price growth.

According to the Australian Industry Group/Housing Industry Association (AIG/HIA), the sector has returned to growth for the first time in more than 3 years. The seasonally adjusted AIG/HIA Performance of Cosntruction Index hit 54.4 points in October, after rising 6.8 points, marking the first time it had recorded a reading above 50 since April 2010.

A reading above 50 signals expansion, while a reading below indicates contraction. The AIG/HIA report says the upturn in October was driven by higher levels of activity in all four major sectors of the industry.

House and apartment building increased solidly for the second consecutive month, and results are consistent with rising order levels. Residential building approvals also showed strong growth. Commercial construction and engineering construction saw a recovery, after consecutive contractions for 39 months and 7 months respectively.

Record low interest rates have finally started to gain traction in the non-mining sectors of the economy, with house prices rising strongly – something the Reserve Bank of Australia has been hoping for, for some time.

The news should prove a fillup for building materials companies such as Adelaide Brighton (ASX: ABC), Brickworks (ASX: BKW), Boral (ASX: BLD) and James Hardie (ASX: JHX). Finally, these companies should see some relief and should be able to grow their revenues and earnings over at least the short-term.

Foolish takeaway

News that Australia’s unemployment rate stayed steady at 5.7% shows the economy is improving, and we could even see it fall as the construction industry recovers further. Most of the gains in the building materials companies appear to be already priced in, and the sector looks fair value at the moment.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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