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Housebuilders down but not out

Created:
7 November 2007
Written by:
Jonas Crosland

The UK housing sector has been written off more times in recent years than would seem healthy. But there has yet to be a crash in house prices like the one seen in the early 1990s, when new house sales dried up and existing home owners became saddled with negative equity.

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There is little doubt first time buyers are finding it harder to join the first rung of the housing ladder. But has the downturn in the share price of house builders been overdone? Persimmon, for example, regarded as one of the better run builders, has seen its share price drop 38 per cent so far this year to leave it trading on 6.6 times 2007 EPS, yielding 5.4 per cent. A lot of bad news has already been discounted.

But, the outlook certainly looks tough in the short term. Bovis Homes, for example, achieved just six fewer completions in the first half of the year at 1,256, and at its first-half results it forecast that volumes would rise between 3 and 4 per cent for the whole year. Since then, however, it has changed its stance and completions are now expected to be down on 2006. Average selling prices are also expected to fall by about 3 per cent, although some of this reflects a shift in the mix of homes it is selling to include more units at the affordable end of the scale.

Much of the change in stance comes as a result of falling enquiries for new houses. Recent data has shown that new mortgage approvals have fallen to their lowest level for more than two years and that home sales since September are down as much as 15 per cent from the same period a year earlier. Analysts also believe that the crisis at Northern Rock has created an unfavourable climate for potential new borrowers.

Other house builders appear gloomy, too. Taylor Wimpey, the UK's largest housebuilder, has warned that growth will stall in the short-term, especially given its significant exposure to the US housing market. And Redrow, with no US exposure, expects to see legal completions down by 10 per cent in the second half of this year.

Analysts have downgraded profit estimates across the sector for 2008, although Credit Suisse believes the sector has attractions for investors with a longer term view. UK interest rates look to have peaked and demand for housing increases every week. That demand will be maintained as long as unemployment remains low. And as price rises moderate or even disappear, the gap between average house prices and average earnings will start to narrow, eroding the affordability gap.

IC VIEW

Shares in housebuilders are discounting a lot of bad news that may not happen, and the long term attraction on current valuations remains compelling. We maintain our buy recommendation on Persimmon at 960p and rate Taylor Wimpey good value at 227.5p, and Redrow good value at 366p.

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