For investors asking whether to reduce their positions in Australian housing-linked stocks, Morningstar analysts have parsed the topic in detail.

For all the calls of an impending housing crash--a rapid drop in residential property prices of at least 20 per cent--the market fundamentals simply don't point to that as a likely scenario.

Morningstar's senior banks analyst David Ellis says that widely held fears of a housing crash need to be balanced against a combination of factors, including tight underwriting standards and low loan-to-valuation ratios among Australian lenders.

"We certainly cannot rule out weak home prices, but investors that readily compare Australia to the US and other markets are glossing over what are in fact fundamentally different residential real estate markets."

AMP economist Shane Oliver believes "much higher unemployment, much higher interest rates and/or a big oversupply" may justify fears of a housing crash "but it's hard to see these".

"Don’t get me wrong, none of this is to say that excessive house prices and debt levels are not posing a risk for Australia. But it’s a lot more complicated than commonly portrayed," he says.

However, Morningstar's view on companies with higher exposure to housing construction has been pulling back in more recent times, as explained by equity analyst Lincoln Valentine.

He refers to an increase in residential dwelling approvals, particularly apartments, in the three months to November 2017, which "puts us at risk of being too pessimistic, but we’re not ready to change our long-term view…we anticipate the need for new housing to taper going forward".

"But we are more positive on the outlook for engineering and infrastructure construction," Valentine says.

Higher infrastructure construction offsets declining residential construction, and drives overall construction growth by around 3 per cent annually over the coming two years.

"This shift is more favourable to those companies with greater exposure to infrastructure rather than residential," he says.

Valentine is less bullish on construction-linked companies with exposure to the residential sector--bricks, bricks, fibre cement, plasterboard, insulation, and other housing products.

James Hardie (ASX: JHX) and GWA Group (ASX: GWA) both currently have a "reduce" rating. While CSR (ASX: CSR), Brickworks (ASX: BKW) and Fletcher Building (ASX: FBU) are rated "hold", they also have high exposure to housing construction.

"All levels of government have jumped on the infrastructure bandwagon and have announced major spending initiatives over the coming five to 10 years.

"The list of multibillion dollar projects under way or in the pipeline is long, and includes likely familiar names: WestConnex, Sydney Metro West, Melbourne Metro Tunnel, Western Harbour Tunnel and Beaches Link, Western Sydney Airport, Inland Rail, the Western Program Alliance to remove level crossings in Melbourne, Melbourne Airport Rail Link, and the West Gate Tunnel Project, to name a few," Valentine says.

On the upside

Construction-linked companies involved in the production of cement, concrete and aggregate are tipped to benefit from this boom in infrastructure construction.

Adelaide Brighton (ASX: ABC) is the largest lime producer and second-largest cement supplier in Australia. It holds a narrow moat, driven largely by its cost advantage and barriers to entry in the cement industry.

"Scale and port facilities give Adelaide Brighton greater bargaining power when sourcing cheaper clinker from Southeast Asia, with seaborne capabilities also supporting its ability to distribute around the country," says Valentine.

Though it has no moat, Boral (ASX: BLD) is among the three key players in cement production, alongside Adelaide Brighton and Cement Australia.

"Boral's presence in the US and Asia provides international geographic diversification," says Adam Fleck, Morningstar Australasia's regional director of research.

Though its US operations had struggled in the past, "downsizing has reduced its leverage, and earnings have rebounded over the past two fiscal years".

"We expect solid profitability improvement going forward…Boral's scale helps to drive cost advantages, as does its ability to leverage manufacturing processes and product research from Australian plasterboard," Fleck says.

In Australia, "we expect roads and highways, railways, harbours, telecommunications, and pipelines to be the main contributors."

"Population growth and urban sprawl will strain existing infrastructure, requiring greater investment by governments. Maintenance and redevelopment also provide ongoing demand," he says.

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Glenn Freeman is a senior editor at Morningstar.

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