Given the well-touted shortage of affordable housing in Britain, we might expect construction output figures to be locked in unshakeable uptrend at this point in the macro-economic cycle.
House building jitters
According to the Office for National Statistics (ONS), though, British construction output fell in January at the sharpest monthly rate since late 2013. The underperforming sector of the industry was house building, where something of a slow-down appears to be gathering pace. Whod have thought it? Not many, apparently.
Construction output shrank by 2.6% in January, just as a consensus amongst economists suggested a rise of around 1.2% was on the cards. Indeed, there was a rise of 0.6% in December, so whats going on? Well, the indications are that total new-house building dropped by 5% month on month, the sharpest fall since February last yearshould investors be worried?
Markets dont rise in straight lines
A play on any of the major London-listed house builders such as Persimmon (LSE: PSN), Bellway (LSE: BWY) and Barrett Developments (LSE: BDEV) has been a good one since the share-price lows of 2008. Since then, Bellway is up 373%, Persimmon up 773% and Barratt Developments up 798%. Those are stunning seven-year returns and they show whats possible with cyclical investments if we catch the up-leg of the cycle correctly.
Those returns are possible, but they are not easy to achieve. To begin with, we must time a jump into the shares at or very near to the bottom. Hitting the buy button too soon must rank amongst the most common of investor mistakes. Its also hard to find the stomach to buy when news flows so relentlessly grim at the bottom of the cycle. Then theres the holding on. For long periods, the shares of these firms looked as if they were going nowhere, at other times they actually fell. Such movements will likely have shaken many out of their house builder investments before now.
Markets dont fall in straight lines
Its unlikely that the house builders will give a clear and unambiguous signal when all the share-price growth is over in this macro-cycle, either. What we may see is a very long period of share-price stagnation accompanied by valuation compression as we work through the current cycle. We could even see share-price reversals, up, downs and false signals even as earnings continue to grow.
However, at some point it makes sense to sell the shares of the house building companies to lock in gains. Ive already sold mine for fear of a potential share-price collapse at some point. Whatever your view, it seems wise to pay attention to news flow surrounding supply and demand in the industry. We cant deny that recent construction data is disappointing even as good news flows from other parts of the UK economy.
The ONS reckons Januarys fall in output might be due to weaker mortgage lending, high house prices, tight funding conditions in the industry and skill shortages in the building and associated trades. Perhaps the weakness will set in as a longer trend. New construction orders fell 2.9% in the fourth quarter, and once again, the biggest fall came from orders for new housing, down 6.5%. Indeed, for 2014 as a whole, new housing orders fell 7.1% compared to growth of nearly 40% during 2013.
Is it just noise?
The current weakness in construction output could be just noise and the house builders shares could have further to run. However, after making such big gains, Im happy to leave whatevers to come to the next guy in this macro-cycle, because the longer we hold on to cyclical shares, the greater the risk thanks to the approach of the next downturn, which never signals its imminent arrival in advance.
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