Can falling house prices be a positive?

Ross Greenwood speaks to Boral CEO Mike Kane who says a decrease in housing prices could lead to a stronger market, as “all the doom and gloom around the housing market is a bit overcooked.”

Ross Greenwood:  Welcome back to Money News right around Australia. One of the things that we continue to talk about of course is the housing industry, and just what impact it might have on the broader Australian economy. Of course there’s another side to this, and we sometime talk about infrastructure, and the fact that Australia needs infrastructure projects ready to go. In the event say for example the housing market does slow down. In the event that say for example Australia’s economy needs some boost. What you don’t want to be doing is doing something which is wasteful with government money, and we’ve seen that in the past.

What you would like to think is that there is infrastructure projects ready to go that ultimately leave an asset, a legacy for future Australians as well. One of those companies that is instrumental to this is Boral. The building products company. Now, not only here, but also overseas Boral has built itself really a very significant base, and so today say for example you saw the half year profit come in. The profit before income tax and significant items down 6.7%, $248 million. The net profit attributable to members up by 36%, we’ll explain that later on, $236 million, but to bring all this together let’s bring in it’s Chief Executive, Mike Kane, who’s always terrific with his time.

Many thanks for your time Mike.

Interview with: Mike Kane, CEO, Boral

Mike Kane: Thanks Ross.

Ross Greenwood:  Right. First up I guess is this whole state of players to where we sit with the housing market right now. Many are suggesting the housing market could be a very deep decline that could have big knock on impacts on the economy. Even the reserve bank with it’s warnings about where interest rates might move next is at least got a weather eye out for the impact that housing might have on the broader economy.

From your point of view, at the coal faces of we’re providing them materials, what are you seeing right now?

Mike Kane:  What you need to know and understand about Australian housing is that we’re currently roughly at 200 000 housing starts, and that is higher than a 50 year cyclical highs. We peaked out at about 232,000 starts a few years ago, and we’ve come down roughly 30,000 starts. I expect that there’s another 30,000 starts to give, and I think that the housing market can retreat to about 170,000 starts. That is still near normal cyclical highs for the Australian housing market.

Now, the price of housing has escalated well beyond normal standards, and we’ve seen a retrenchment of the price in housing go back.

I actually think that makes housing more affordable and can sustain a longer housing market than– We were getting at ridiculous levels in terms of average housing market in Sydney for example being house price of a million dollars was putting it beyond the reach of the middle class to break into that market. I think all the doom and gloom around the housing market is a bit over cooked.

That said in terms of Boral’s earnings it’s 20% to 22% of our total revenue, and we get almost twice as much out of the infrastructure market than we do out of the housing market, and that market has gone on unabated and very strong.

Ross Greenwood:  Okay, so let’s go to this side of it, because as I indicated in the introduction, one of the things is that Australia, and we spoke with infrastructure Australia last week as it put out it’s list of new priorities. It’s got to have those projects absolutely shovel ready to go, so that as a result if there were a downturn caused by the easing of the housing market, that those infrastructure projects don’t slide, that they continue potentially apace to create the jobs and create demand in our economy as well.

Mike Kane:  There’s no question Ross that infrastructure investments are productivity investments in the future of the country, and unlike writing a cheque, and giving somebody cash which can be spent and pretty well exhausted, an infrastructure investment pays off for 30 to 50 years after the investment is made. That’s why infrastructure is so beneficial to the Australian economy.

Ross Greenwood:  Okay, so when you then go to the creation of the building products that you have got. Plaster boards, cement, they’re all very heavy energy intensive types of products. Just explain where you are right now as you’ve started to see the economy cool down, certainly the price of energy has not come off terribly much across the whole of industry, but what are you sensing for the future? Is there enough gas around the place? Is there enough electricity to really make certain that Australia can produce these types of products?

Mike Kane:  Well, the fortunate thing for us is that the one area where we were most vulnerable was in the cement side of things, and we’ve taken steps to pick up our imports of cement out of Asia. It’s the only material in our portfolio that travels great distances, so we were able to do that. Aggregates, concrete, asphalt, are all locally produced, but they’re not as energy intensive as cement manufacturing is. For that reason we’re in good shape. These will be the increasing demands of energy cost in this country. Diesel fuel cost are a big issue for us, and that’s really a global market and we think that the fact that it’s a global market moderates the impact of increases.

The real challenge in Australia is electricity and heating cost associated with natural gas and electricity generation. That’s going to be a consumer issue for decades to come if this country doesn’t get its act together on providing a base source of power for the economy. It’s going to hollow out some key manufacturing industries. We’ve got a remaining cement plant in Australia that electricity cost continue to go with the way they’re going, it’ll shorten the life of that plant and just force us to go offshore to bring in that balance as well. There are some challenges in this economy.

There’re definitely an inflationary economy both for wage inflation, energy inflation, land inflation, capital cost inflation. We’re able to get pricing offsets for that and we’re grateful for it, and we’re less dependent on energy than some of other industry. What we really have to be careful about is that we don’t hollow out manufacturing in this country to the point where we’re left with nothing but service jobs, because frankly they’re not as lucrative. This will damage long term the middle class in Australia.

Ross Greenwood:  It’s one of those thing people got to understand that we don’t hollow out manufacturing, and try and rely thoroughly on services, because long term that will damage the long term wealth of Australian families. Just hindsight being hindsight, you would be very pleased, given the performance of your US operations that you did diversify overseas, and especially with that head boarders acquisition.

Mike Kane:  Absolutely. When you look at the US they’ve got all time low energy cost, low unemployment. They’ve got more attractive diesel fuel and petrol cost, by far than we have here in Australia. Low taxing environment with changes to the federal tax code. The stage is set for a continuous boom in the US economy for quite some time, and they’re absent of political dislocation is that shouldn’t change over the next 10 to 15 years.

Ross Greenwood:  It’s just an astonishing thing. Okay. Tell me though a couple of other bits and pieces. Are you at all concerned about the prospect of a labour government given the fact you have not been frightened to dish up to the unions in the past, the Australian building and construction commission could be eliminated by labour and the fact that you have been so outspoken, does that concern you if there is a change of government?

Mike Kane:  Of course it does concerns, because whatever tinkering is done with the labour laws in this country will just drive expense in the business community, and that expense is going to have to paid for in higher prices or else it’s going crimp margins of industries. It’s not a good turn if that happens.

Another way to look at a change in government is, I was concerned about the Andrews government in Victoria when they came in, and frankly the net effect has really- I’ve not seen much difference in the infrastructure space between the Andrews government and the government New South Wales.

The reality is that both is a by-partisan support for infrastructure spend in Australia across both the labour party and the liberal party, and frankly that’s probably more important to us than anything else. Sure, I think the construction commission was an important step in taking thuggery out of the construction market, and if it’s done away with, it will just reintroduce these unhelpful and costly problems that this country has experienced for a long, long time. We’ll see what happens.

Ross Greenwood:  Mike Kane, Chief Executive of Boral. I’ve got to say it’s always great to have you in the program. Always very candid and frank, and again we’ll pick you up and have a chat with you down the track.

Mike Kane:  Thank you. Take care Ross.

Image source: 2GB

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