Australia’s latest housing data appears to be quite promising, though concerns that the market is approaching bubble territory and poses a potential threat to a nascent economic recovery persist.

The Australian Bureau of Statistics (ABS) reported on Jan. 13, 2014, that the value of home loans approved in Australia rose 1.1 percent month over month in November 2013 and 15 percent compared to November 2012, a sign that record-low interest rates are driving demand for houses and apartments.

But the rise in the value of mortgages approved continues to be driven by people looking to invest in property rather than those seeking to move into houses or apartments. Investor loans exceeded 30 percent in November.

And first-time homebuyers are having a hard time in a market where house prices have hit record highs in some large cities. First-time homebuyers accounted for 12.3 percent of November approvals, the lowest level in more than two decades.

According to research group RP Data-Rismark, home values in capital cities rose by almost 10 percent in 2013. Prices in Sydney, the country’s largest property market, were up by almost 15 percent, while prices in Melbourne and Perth also surged.

The threat is that rising house prices coupled with strong investment buying and falling demand from first-home buyers will cause a crash and derail Australia’s broader economic recovery.

The sizes of mortgages are rising in line with rising house prices, making it more difficult for first-time buyers to put together down payments.

The Housing Industry Association (HIA) has posited that with the Reserve Bank of Australia’s benchmark interest rate likely to stay at 2.5 percent for some time–with risks weighted heavily to the downside–first-time homebuyers will eventually return to the market.

Investors are first off the starting line, with first-time buyers lagging. But according to the HIA first-time buyers are usually the last group to act in a housing recovery.

The HIA reported on Jan. 10, 2014, that new-home sales rose by 7.5 percent in November 2013 from October 2013, the fastest pace since January 2010 and a positive sign for a broader recovery dependent on a pickup in areas such as construction and consumer spending.

The more new homes sold, the greater the need for buyers to fill them with furniture, appliances and other household goods. And stronger demand for new houses and apartments means more work builders, which means more jobs.

The Reserve Bank of Australia (RBA) has cut interest rates eight times since December 2011, from 4.75 percent to a record-low 2.5 percent, part of an effort to offset the impact of a slowing resource sector on the broader economy Down Under.

Other data should at least partially allay fears that house-price gains are way out of line with more modest improvements in the Australian economy.

On Jan. 9, for example, the ABS reported that retail sales rose by 0.7 percent in November 2013, compared to October 2013, beating the 0.4 percent consensus estimate and the seventh straight month of gains. Sales were up 0.5 in October and 0.9 percent in September.

And according to the Australian Retailers Association, Boxing Day sales exceeded AUD2 billion for the first time eve. The ARA forecast that revenue in the post-Christmas period, ending mid-January, would hit a record AUD15.1 billion, up 4 percent compared to the prior corresponding period.

RBA data reveal that overall credit demand was up 3.8 percent in November 2013 following a 3.5 percent gain in October. Home loans accounted for most of the gains, but personal lending also climbed, by 0.8 percent, reversing a 0.6 percent contraction in November 2012.

The most recent ANZ Bank/Roy Morgan Research Consumer Confidence Index reading came in at 117.5, driven mainly by respondents having more confidence about their own personal financial situation compared to a year ago, with 33 percent of Australians saying they are “better off financially” than this time last year, the highest level since October 2013.

Mark Steinert, CEO of Stockland (ASX: SGP, OTC: STKAF), Australia’s largest housing development company recently told the Australian Financial Review that the current recovery in housing could last at least another three years.

According to Mr. Steinert, the key “is not interest rates; it is confidence.” He noted that rates were relatively low at the beginning of 2013 but markets remained flat. A softer Australian dollar, however, has helped broaden economic growth. Mr. Steinert said that even a 100 or 150 basis point increase in interest rates–to 3.5 or 4 percent would add volatility but not subtract from overall demand.

What will provide long-term support for the Australian housing market is an effort to mitigate a supply-demand imbalance.

Rising house prices drive confidence. And that should drive demand for new housing. Meeting this demand should fix the supply-demand imbalance, providing jobs outside the resources space.

Paint It…

Two-thirds of paint, glue and garden products supplier DuluxGroup Ltd’s (ASX: DLX, OTC: DULUF) business is exposed to the home renovations market, and 16 percent is exposed to new housing.

Management recently noted “good indicators in residential home improvement” and “green shoots” in new housing construction.

DuluxGroup’s main revenue driver is paint, the biggest single market in the home-renovation space, Paint sales were up during fiscal 2013 during an otherwise flat market for the broader home-renovation category during fiscal 2013.

In Australia and New Zealand, which account for more than 90 percent of revenue, factors such as low interest rates, rising consumer confidence and improving house prices over the course of the second half of fiscal 2013 underpin management’s positive outlook for fiscal 2014.

DuluxGroup expects continued strength in the New Zealand market driven by the rebuilding of earthquake-damaged Christchurch.

Markets in China and Papua New Guinea, which collectively provide about 7 percent of revenue, are expected to remain soft in the near term.

DuluxGroup reported net profit after tax (NPAT) of AUD76.9 million for fiscal 2013, ended Sept. 30, 2013, down 14 percent from AUD89.5 million for fiscal 2012.

Excluding non-recurring items, profit rose 18 percent to AUD94.1 million, as the group benefited from the acquisition of building products and garage door maker Alesco in December 2012 and boosted its market share.

The integration of Alesco continues, with realized cost savings to date exceeding management’s expectations. The focus has shifted to expanding Alesco’s marketing budget to boost market share and revenue.

Management expects NPAT ex-items to “exceed” fiscal 2013 in fiscal 2014.

DuluxGroup, which is yielding 3.2 percent and hasn’t cut its dividend since making its first declaration in November 2012, is a buy under USD5.

Get Plastered

Boral Ltd (ASX: BLD, OTC: BOALF) is a manufacturer and supplier of building and construction materials in Australia and abroad. The US and Asia are its primary international markets.

The company supplies products to the residential and commercial building markets, operates clay brick business in the US (for clay roof tiles and fly ash) and also produces plasterboard, timber products and concrete products.

Boral raised its final dividend by 71.4 percent after reducing its fiscal 2013 interim dividend to AUD0.05 per share from AUD0.075. That left the full-year dividend flat at AUD0.11 per share.

Revenue from continuing operations was up 10.5 percent to AUD5.209 billion, though management reported a net loss of AUD212.1 million on AUD328.1 million in impairments and writeoffs. Net income excluding items was up 3.2 percent to AUD104.4 million.

Fiscal 2013 was another difficult year for the company, but management has implemented a number of changes to establish a foundation for solid performance throughout the business cycle.

Boral continues to streamline its portfolio by divesting underperforming or non-core assets, while the organizational structure, including a reduction in the number of employees, has also been simplified to cut costs.

A detailed review of overhead costs led to the reduction of more than 800 positions, which is expected to deliver AUD90 million in annualized costs savings beginning in fiscal 2014.

Total CAPEX was reduced below AUD300 million, while AUD173 million of cash was generated from divestments and the sale of surplus land out of a two-year target of AUD200 million to AUD300 million.

And Boral recently announced a strategically significant USD1.6 billion plasterboard and ceilings joint venture with USG Corp (NYSE: USG) that will transform Boral’s gypsum business.

The 50-50 joint venture, USG Boral Building Products, combines Boral Gypsum’s leading plasterboard manufacturing and distribution footprint across Asia and Australia with

USG’s building products technologies and strategic assets in Asia, New Zealand and the Middle East.

This transaction should bolster Boral Gypsum’s market leadership position for the long-term across Asia, Australasia and the Middle East. It will drive Boral’s goal of achieving long-term growth in Asia, one of the fastest growing plasterboard regions in the world.

At the same time, the transaction also significantly strengthens Boral’s balance sheet. To establish its 50 percent interest in the joint venture, USG will make an upfront cash payment of USD500 million to Boral when the deal closes, which is expected sometime this month.

Boral also has the potential to receive earn out payments of up to USD75 million within five years.

Boral management will use the majority of the USD500 million cash payment to reduce debt, other capital management options–including share buybacks and/or dividends–to be considered subject to market conditions. Boral is a buy under USD4.80.

The Kitchen Sink

GWA Group Ltd (ASX: GWA, OTC: GWAXF, ADR: GWAXY) designs, manufactures, imports and distributes fittings for households and commercial buildings, including bathroom, kitchen and laundry products, hot water and ducted heating and cooling systems, and door hardware and fittings and garage doors and openers.

GWA is well positioned to take advantage of recovery in home-building activity Down Under after significant restructuring activities, acquisitions of complementary businesses and efforts to boost its competitiveness.

Management recently announced that GWA won’t pay an interim dividend after announcing a AUD17 million impairment charge to be taken against fiscal 2014 first-half results on its Gliderol garage door business.

Management noted that “significant improvements” have been achieved for the unit and that trading results are beginning to reflect this. But progress has been slower than expected. The top priority now is on growing sales and market share amid an improving overall market for the home improvement segment.

But the impairment expense means that GWA is unlikely to have sufficient retained earnings from which to pay an interim dividend, as the board believes it “unwise” to make a payout that’s not backed by profits.

Management expects to resume its dividend with the final payment for fiscal 2014.

GWA did reiterate full-year earnings before interest and taxation (EBIT), and excluding the impairment charge, of approximately AUD80 million.

GWA is beginning to see the benefits of its December 2012 restructuring, as Bathrooms & Kitchens market share gains led to 31 percent growth in fiscal 2014 first-quarter EBIT. Sales revenue was up 2 percent. GWA is a buy under USD2.80 for aggressive investors.

Sugar High

CSR Ltd (ASX: CSR, OTC: CSRLF) is a pure-play building products and aluminum producer.

Assets on the building products side of the business include Bradford Insulation, which makes and markets thermal, acoustic and fire insulation; Gyprock, which makes plasterboard, or drywall; Viridian, which makes all types of glass for all types of construction projects; Ceilector, which manufactures ceilings; Hebel, which makes lightweight building material out of an aerated concrete material; Monier/Wunderlich, which makes roofing tile; PGH Bricks & Pavers, the name of which explains rather well what it does; and Cemintel, which makes weatherboard, planks and cladding panels, or siding, for commercial and residential construction projects.

CSR also owns 70 percent of Gove Aluminium Finance Ltd, which owns 36.05 percent of the Tomago aluminum smelter, the second-largest smelter in Australia. It’s reputed to be one of the world’s lower-cost and more efficient aluminum smelters.

Aluminum exposure has been a drag for CSR in recent years, though fiscal 2014 first-half results from the unit surprised to the upside.

The Building Products division also beat expectations, with earnings before interest and taxation (EBIT) up 19 percent versus the prior corresponding period. The bulk of the improvement was driven by price increases.

Management also indicated that the underlying operating environment is beginning to improve, with volumes up 3 percent in September and October 2013 versus the prior corresponding period.

The restructuring of the troubled Viridian building glass unit remains on track, though import competition continues to present a challenge.  The loss generated by the glass business was in line with expectations. Management did note that the lower loss compared to the prior corresponding period was due to restructuring initiatives, with little improvement in underlying demand.

Nearly three years ago, in March 2010, CSR sold Sucrogen, the largest raw sugar producer and refiner in Australia and the eighth-largest company of its type in the world, for AUD1.75 billion. The sale allowed the company to return a total of AUD800 million to shareholders in the form of a special distribution.

And CSR was also able to repay all of its then-outstanding debt. There are now no maturities before 2025. The company still incurs financing costs related to asbestos litigation settlement provisions and to maintain banking facilities. But the balance sheet is in good shape, with Standard & Poor’s rating the company BBB+.

CSR is a buy under USD2.60.