Housing starts are up but face risks

Housing starts are at their highest level since 2007 and share prices of building stocks have jumped much more than the market. But there are risks to keep in mind.

building_stocks

Building stocks have climbed much more than the market thanks to housing starts at their highest level since 2007.

Canadian housing starts rose by seven per cent in August, to a yearly rate of 262,396. That’s the highest since September, 2013. Record-low interest rates make carrying a mortgage more affordable. And more people working from home raised demand for houses and to renovate them.

Higher demand has sent up the share prices of building-supply stocks. All 10 featured on The Back Page are up, by an average of 61.7 per cent. This greatly exceeds the corresponding increase of 12.5 per cent in the S&P/TSX Composite Index.

But there are some risks to keep in mind. First, all of the high starts are in the ‘multi-residential’ segment of the market, such as condominiums. Starts of detached houses declined somewhat. But more work-at-home people prefer low-rise houses, which are usually larger than condos, offer more outdoor space and have no monthly fees. This mismatch between demand and supply could hurt sales.

Rising COVID-19 cases could hurt sales

A second risk is a ‘second wave’ of COVID-19. In September, the number of COVID-19 cases began rising in populous Alberta, BC, Ontario and Quebec. This may require a lock-down of, say, bars and restaurants. Also, many schools have classes with more than 15 pupils. If COVID-19 returns in a significant way, home construction, purchases and renovations could fall back.

A third risk is slower-than-expected economic recovery. Many jobs returned after the lock-down restrictions were eased. But some observers worry that more jobs will be harder to come by as the recovery matures. Those without jobs are unlikely to buy homes. In fact, they may find themselves forced to sell houses on which they can’t service mortgages.

A fourth risk is what’s known as a K-shaped economic recovery. That is, higher-income individuals quickly recoup any job losses or reduced hours. But lower-income workers fail to fully recover. Those who work for airlines, hotels and entertainment venues, among others, face bleak short-term prospects.

A fifth risk is the time of the year. September is the one month that share prices fall, on average. In October, prices rise more often than not. But when stocks do fall in October, they can plummet. Most of the stock market’s worst crashes occurred in October. A crash in 2020 could unnerve potential home buyers or renovators.

Hardwoods Distribution Inc. (TSX—HDI), PFB Corporation (TSX—PFB) and Stella-Jones Inc. (TSX—SJ) remain buys for further long-term share price gains and dividends. Just remember that we rate Hardwoods ‘Higher Risk’ and PFB ‘Speculative’. Richelieu Hardware (TSX—RCH) remains a costly ‘Higher Risk’ hold for share price gains and small dividends.

This is an edited version of an article that was originally published for subscribers in the September 25, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

Comments are closed.