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Consumer sentiment up in October with property market rise

There does seem to be something in the air about the housing market. News reports of Sydney auctions going above reserve prices, and more competition amongst buyers indicate a rally in that capital city.

This month the Westpac Melbourne Institute Index of Consumer Sentiment reported a 1.9% increase to 110.3 in October, adding to the 4.7% increase following the September Federal election.

Sydney led in the state by state consumer sentiment increase, up 7.7%, and house prices there in the September quarter rose by 3.6% as opposed to the national price growth of 1.9%. Melbourne was up 1.9%.  Brisbane and Perth had positive gains of 1.2% and 0.2% respectively, and Adelaide slipped 0.6% down for the period.

Tempering this is concern over job security. The report’s Unemployment Expectations Index signalled a 0.9% increase to 144.7, which is 11% above the November 2011 level.  Notwithstanding, the index covering “Time to Buy a Dwelling” had a strong 4.2% rise in New South Wales, rises in Western Australia and Queensland, but decreases in Victoria and South Australia.

Investors may still have time to look over and assess which quality companies could benefit from this move in housing, and while things aren’t 100% positive everywhere, it hasn’t moved into full swing yet.

As written previously, companies involved in housing construction would see increased revenues from a turn up in new home building, and major developers like Stockland (ASX: SGP) and Mirvac Group (ASX: MGR) stand to gain. You can also look at the smaller developers and builders, which will also be hard at work to take advantage of any rise in housing.

Peet Group (ASX: PPC) is a land developer and land syndicator operating in WA, VIC, QLD and NSW. Revenue slipped in 2012, but has revived in 2013 to be its highest in 10 years. Net profit after tax and before abnormals was up from $5.2 million to $15.5 million. Share price is $1.43 with a price-to-earnings ratio of 31.

Sunland Group (ASX: SDG) develops and sells land and medium density housing.  Revenue has been down from a 2009 high point, but renewed market interest has brought up the share price from $1 to $1.41 since the beginning of the year.  It also has a high PE at 33.

Villa World (ASX: VLW) only develops residential land, and sells house and land packages. In 2013, it had a net loss after tax of $13.4 million, but over the first four months of FY2014, it reported 327 sales worth $120.4 million, the strongest start of a financial year since 2010.  Its share price has gone from $0.75 to $1.87 since early January.

Foolish takeaway

These share price rises may be compelling, but you always have to ask the value-price question. For any price, what is the value you get? Look at the companies’ track records. How did they perform in the lean years as well as the growth years? Are they diversified enough in geography and product to have a competitive advantage and staying power when the next housing bust comes? Always seek out quality because at any point in the cycle it demands a premium.

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

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