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A steeper than expected drop in Sydney house prices is crushing this stock

The share price of CSR Limited (ASX: CSR) is getting hammered today as fears about a hard landing in the Sydney housing market is forcing jittery investors to exit the stock.

Shares in the building materials supplier tumbled 3.2% to $3.82 in the last hour of trade and is one of the worst performing stocks on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.

The latest Australian Bureau of Statistics (ABS) data showed that Sydney house prices fell 1.2% in the June quarter and that is significantly worse than the 0.7% drop predicted by housing market research firm CoreLogic, according to the Australian Financial Review.

The decline in Sydney’s house prices is still accelerating with the annual fall coming in at 3.9% – the largest since the March quarter of 2009, which marked the depth of the GFC.

The interesting thing is CSR’s near-term profits are not under threat due to a large backlog of work but Bell Potter believes this party will end sooner than some investors might expect.

“Industry feedback indicates slowing customer enquiry rates, sales activity and builder sales at large-scale new land developments in recent months, most dramatically in Sydney (South Western Sydney in particular),” said the broker, who has a “sell” recommendation on the stock with a price target of $3.50 a share.

“We expect to see commencement and WIP [work-in-progress] levels remain elevated in the short term due to this backlog of work (masking the underlying market weakness), then forecast a material decline in dwelling starts in 6-12 months’ time.”

What’s more, CSR’s Tomago aluminium smelter could run into trouble when its alumina (the mineral used to make aluminium) contract ends at the end of 2019.

The price of alumina has spiked due to supply disruptions but CSR is protected by its current contract as the amount it pays for the commodity is linked to the London Metal Exchange (LME) aluminium price.

Without the contract, the price CSR has to pay could double, according to Bell Potter, who believes Tomago’s margins are likely to come under pressure from 2020.

Other building material stocks are also in the red with Boral Limited (ASX: BLD) and James Hardie Industries plc (ASX: JHX) down around 1% even though they are much better placed due to their large US market exposure.

What I find interesting though is that the price of apartment builder Mirvac Group (ASX: MGR) is up 1%. Mirvac has significant exposure to the weakest link of the property market as its key market is Sydney and its units are geared towards investors.

Experts believe there is a significant oversupply of apartments in Sydney and investors are on the retreat as banks are restricting lending to this segment.

Like CSR, Mirvac’s near-term earnings are safe as it has pre-sold just about all of its inventory. But you have to wonder if the chickens will come home to roost in FY20 given that this downturn is looking like a fairly protracted event.

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Motley Fool contributor Brendon Lau owns shares of Boral Limited. 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 Scott Phillips.

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