The derating has accompanied a largely unexpected cooling in the housing market. Mortgage approvals for house purchase rose 35 per cent year on year in the first quarter, but only 7 per cent in the months April to June. The slowdown has been most pronounced in London, where headlines about 'panic selling' have started to appear.
In part the year-on-year growth figures simply reflect improving comparatives. The housing recovery kicked off with the Budget of March 2013, after which transaction numbers rose steadily (even if you strip out the usual seasonal effects). So it shouldn't be a surprise that year-on-year growth is weakening.
More unsettling - although hardly unexpected - has been the Mortgage Market Review (MMR). With effect from April, this new regulatory framework forced lenders to impose stricter affordability criteria on customers. It may have brought some loans forward into the first quarter, as banks rushed to complete transactions under the old rules, while holding some business up in the second. The extent to which it has also structurally impaired the market remains unclear.
But perhaps the biggest factor has been waning consumer confidence. As the prospect of interest rate increases has drawn closer, home owners may have become less keen to take on big debts.
Whatever the reasons, the reversal of the previous trend has spooked investors. They had bid housing stocks up on the basis of what appeared to be a straight-forward cyclical recovery. The renewed uncertainty in the outlook made the high ratings look unwarranted.
Yet there have been signs that the housing sector is bouncing back. Mortgage approvals - the data that gave the clearest warning of the spring lull - are now rising again. Seasonally adjusted, there were 67,196 approvals for house purchase in June, according to the Bank of England - up 8 per cent month on month and the most since February. That followed four month-on-month declines.
If this is another inflection point for the sector, investors would do well to buy back in. The most obvious option is to pick up shares in a housebuilder - an option we have debated at length at Investors Chronicle. My position remains that the shares, with some exceptions such as Bellway (BWY), still look expensive relative to book value, given the foggy outlook.
Happily, an alternative is offered by the listed estate agents, which make a sizeable grouping now that Countrywide (CWD) and Foxtons (FOXT) have gone public. To my mind, this is the superior play.
For a start, the shares are not obviously expensive. Shares in LSL Property Services (LSL) - the only big estate agent with a long stock market record - now trade on under 10 times consensus earnings forecasts, according to Bloomberg. That's down from 18 a year ago, and is in line with LSL's average for the past seven years, which have been tough ones for estate agents. Unless June's mortgage rebound was a flash in the pan, earnings downgrades seem unlikely.
Moreover, buying shares in an agent is a bet on housing transactions, not house prices. If tightening monetary policy deflates asset prices, which is one investor concern, housebuilders may have to write down their land banks, and sales will take a hit. But - as long as the declines are gentle - estate agents may actually benefit. Housing transactions are growing fastest in the north west, where house price inflation (HPI) is running at 3.5 per cent; they are growing most slowly in London, where HPI is 19 per cent. With first-time buyers driving the recovery, "lower prices have supported a stronger market", reports data provider Acadata.
Finally, the lean years forced estate agents to diversify. That leaves them much less dependent on housing transactions than they used to be - or than housebuilders are. Countrywide, LSL and Foxtons all have major lettings and property-management divisions that should thrive if transaction numbers fail to deliver the straight-line recovery expected at the start of the year. The first two companies also have repossessions businesses, which should also pick up with interest rates.
Perhaps the most unfair derating of them all is that of shares in Belvoir Lettings (BLV), a tiny Aim-traded lettings franchiser. Even though it has virtually no exposure to the transactional business of most estate agents, it has sold off with the sector. That looks a fairly clear case of baby and bathwater.
