JP Morgan analyst Brook Campbell-Crawford said anything with exposure to residential construction was a hard area for investors, with housing weighing on company earnings and the market sentiment towards their shares. “It’s absolutely forward looking - these stocks which have de-rated is very much a function of where we’re going to go," he said. "Everyday in the papers there’s negative headlines around housing, the starts data is weak and coming off, so I think there’s more to play out.” Housing starts is the measure of how many new projects have broken ground in a particular period. The most recent Australian Bureau of Statistics figures show starts fell 5.9 per cent in the June quarter, on a seasonally adjusted basis. CSR - which makes plaster board, bricks and concrete panels - has about 60 per cent of its earnings leveraged to residential construction, Campbell-Crawford said, and while it might appear to be cheap after heavy falls this year, it would have to fall further for it to be considered an attractive buy.

While CSR has said it still sees strong underlying demand for housing, supported by population growth, good employment figures and low interest rates, Fletcher Building downgraded its guidance last month based partly on the Australian housing outlook. Loading Fletcher chief executive Ross Taylor said the contraction of new building starts "feels like a medium-term trend and still has some distance to run yet". Meanwhile, Adelaide Brighton on Friday issued a full-year downgrade, cutting its expected profit to between $188 million and $195 million, compared to guidance of $200 million to $210 million given in August and last year’s profit of $190 million. That sent its shares down more than 8 per cent in morning trade to almost two-year lows.

National accounts data released this week showed that manufacturing fell 0.7 per cent in September, driven by building materials. Property auctions in the second last week of November had a clearance rate of 41.9 per cent, according to CoreLogic - the second lowest rate since June 2012 - and rose to 47 per cent last week. Prices, meanwhile, are down 9.5 per cent in Sydney from highs in July 2017 while Melbourne prices have fallen by 5.8 per cent over the past 12 months. Economists expect prices to slide further, off 10 to 20 per cent from peak to trough, brought on partly by regulators forcing banks to improve the quality of their mortgage lending. A fall in house prices reduces demand for new dwellings from investors, which flows through to developers who find it hard to justify new projects or guarantee prices on new dwellings which in turn makes it harder to finance new projects.

Loading While this causes acute pain for the companies directly dealing in housing, economists are concerned about the boarder ripple effect softening house price will have on the economy via consumer spending. Consumers, who are already reluctant to spend due to low wage growth,are likely to become even more cautious as the value of their homes fall, threatening to take a bite out of spending growth, which is tracking at around 3 per cent annually. On Wednesday new quarterly figures caught economists by surprise showing quarterly consumption growth of 0.3 per cent - about half what the market expected. “Consumer spending really has been surprisingly resilient in the face of ongoing low income growth," said ANZ senior economist Felicity Emmett.

"But I think it will be hard to sustain growth at that [current] 3 per cent level with house prices falling." ANZ estimates the banks switching customers from interest-only loans to principal and interest loans will take about 0.2 percentage points off consumer spending growth over the next few years alone, with the impact of falling house prices on top of that. While the RBA has been forecasting real consumption growth at close to 3 per cent, JP Morgan expects it to be closer to 2 per cent. “The consumer is the majority of GDP," said JP Morgan senior economist Ben Jarman. "So that difference equates to whether you get GDP growth of above 3 per cent or below - above trend or below trend - so this whole spill over from housing to consumer through credit conditions I think is the most important space to watch."

Ratings agency Moody's warned this week that a prolonged weakening of house prices would create a "negative wealth effect" on spending. "If indebted households retrench consumption significantly, there would be material spillover effects on the broader economy," said analysts Daniel Yu and Patrick Winsbury. "Although policymakers have fiscal and monetary policy buffers against such events." Citi analysts recently crunched data on 24 state specific housing downturns (a decline of more than 5 per cent in dwellings prices) since the 1980s. Before each of these downturn, retail sales growth averaged 5.7 per cent. By the time the downturn had bottomed out retail sales growth almost halved, to 2.9 per cent. Recent research by UBS found a six-month gap between house prices falling and consumers snapping their wallets shut - suggesting that while many retailers might already be hurting, the real pain is yet to hit.