3 shares to avoid if the property market starts to crack

A slowing property market would be very bad news for shares like Lendlease Group (ASX:LLC).

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Rising property prices have certainly made Australian households feel a lot wealthier over the past couple of years, particularly for those people who own property in Sydney and Melbourne.

Falling interest rates and an imbalance between supply and demand have been two of the major drivers behind property returns over recent years, but signs are now starting to appear which suggest the tide could be about to turn against property investors.

Unfortunately, a property downturn would also be bad news for the share market as a large number of companies are either directly or indirectly exposed to the housing market and the impact this has on consumer confidence.

With that in mind, here are three shares that I would avoid if the property market begins to crack:

Commonwealth Bank of Australia (ASX: CBA)

Australian banks are very highly leveraged to the property market which means their risks and returns are magnified during the upswings and downturns of the cycle. As Australia’s largest lender, the Commonwealth Bank is perhaps the most exposed to the risks of the property market, contrary to what some risk-averse investors might think. The shares aren’t particularly cheap at the moment either as they are currently trading at more than 15x earnings.

Lendlease Group (ASX: LLC)

Lendlease has operations across a number of markets and regions but the developer still generates a significant proportion of its earnings through the construction of high-rise apartment blocks in urban centres including Melbourne and Sydney. These markets have enjoyed very strong momentum recently, but I would be very concerned if the supply and demand balance moves in the opposite direction. The Lendlease share price has risen by more than 32% over the past year and I would be very tempted to lock in profits right now.

Harvey Norman Holdings Limited (ASX: HVN)

Retailers of household goods and furnishings have been some of the major beneficiaries of the housing boom and Harvery Norman has been no exception to this. Not only have consumers furnished new or renovated properties in rising numbers, the ‘wealth effect’ has also given people the confidence to go out and buy high-priced items such as new appliances and furniture. The threat of Amazon has hit the retail sector pretty hard over recent months, but a slowing property market could be an even bigger blow to a sector that is already out of favour.

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Motley Fool contributor Christopher Georges has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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