UK housebuilders have delivered an impressive performance over the past year, with share gains ranging from 179 per cent for Barratt Developments (BDEV) to a still hefty 66 per cent by Galliford Try (GFRD). This has driven up valuations significantly, so that Berkeley Group (BKG) is trading at around 2.4 times net tangible assets, with Bovis (BVS) trailing the pack at 1.3 times. And given that housebuilders don't normally outperform at this time of the year, on these sort of valuations we would normally be suggesting taking those profits and perhaps moving back into the sector later in the third quarter.
But these are not normal markets. The government has made housing recovery one of its key pillars for stimulating greater economic growth, and a number of incentives have been put in place, including NewBuy and FirstBuy, both designed to help first-time buyers overcome the task of raising the sizeable deposits demanded by lenders. The latest move, known as Help to Buy, has taken things a stage further by offering interest-free equity loans for those who can't raise the deposit, but this time not just to first-times buyers, but to everyone. And the house price purchase limit has been raised to £600,000.
The effects of these measures have been swift and dramatic, with housebuilders already reporting a significant amount of business coming through incentive schemes. And reservations about housebuilders limiting supply and driving prices higher have proved to be unfounded. Indeed, housebuilders are very happy with the latest scheme because unlike earlier incentives, none of the equity loan is underwritten by housebuilders themselves. And with interest rates set to remain at rock bottom for some time yet, effectively, Christmas has come early for housebuilders.
And that is why we feel more comfortable about some of the high valuations on housebuilders' share prices. True, the incentive schemes will be withdrawn at some point, and margin improvements will slow as more legacy land is used up, but housebuilders will be happy to improve profits by opening up more sales outlets. And provided house price inflation (outside London) shows little sign of accelerating significantly, housing starts look set to grow steadily from their current depressed levels.
