Housebuilders' shares have risen in the first quarter of the year in 23 out of the last 27 years, and as this pattern has become established, investors have started to try to get in before the trend develops, which has led to the better tone starting in December. But will 2008 will prove to be the exception?
On the minus side, there are several factors that provide a gloomy outlook. There is a squeeze on mortgage lending - rates are actually rising as a result of the credit squeeze - and house prices are still showing a year-on-year rise. However, housebuilders have several factors in their favour. Many analysts are now convinced that UK interest rates will be cut at least twice in 2008, while house price inflation is slowing all the time. Then there is the permanent gap between supply and demand where the government is making efforts to alleviate the chronic shortage of affordable housing by streamlining the planning system and boosting output.
This all starts to make the savage downturn in housebuilders' shares this year a little overdone. The builders are certainly facing a slowdown in demand, but completions have not crashed. And most builders have been careful to accumulate considerable land banks, which could provide the required number of building plots without the company spending money on replenishment. It's a short-term fix, but would certainly save money if there were strong evidence to suggest that land prices were in steady decline.
Current valuations are pricing in some very bad news which it's not immediately obvious will actually take place. Persimmon, for example, one of the better run housebuilders, ran up record profits in the first half of the year. And yet its share price has fallen nearly 50 per cent this year to leave it trading on a forward PE ratio of 5.6 and a forward yield of 6.5 per cent. And, with a solid dividend cover and low gearing, it looks as though the downward rating has been overdone. True, some housebuilders will make harder work of things, notably those with a higher exposure to US markets like Taylor Wimpey. But even that looks to be in the price, with the shares trading at a significant discount to the net asset value. Housebuilders are remarkably cheap at the moment, and now might be the time to buy.
