Alpha 

Alpha Sector Report - Housebuilders: Finding room for more upside

Alpha Sector Report - Housebuilders: Finding room for more upside

Cheap mortgages, rising wages, benign land prices and the government's Help to Buy have buoyed housebuilder shares. The question going forward is whether the good times are set to continue or if slower house price inflation and persistent supply side (cost) inflation will spoil the party. 

Key points:

  • The market in existing housing remains in the doldrums as homeowners sit on their hands, not willing to commit to bigger mortgages, thanks to affordability concerns and possibly economic uncertainty due to Brexit. By contrast, sales of new homes are still buoyant, with the government’s Help to Buy scheme the main driver; some major housebuilders make half of their sales to buyers using Help to Buy.
  • Rising labour costs have the potential to dent housebuilders’ profit margins, although sterling’s recovery has helped trim the cost of imports. Increased output could help maintain bottom lines if margins fall but planning constraints are problematic. Overall, the rate of profit growth is expected to slow. 
  • Years of undersupply in the housing market, which has its root in a dearth of social housing construction since Right to Buy in the 1980s, mean that housebuilders could theoretically keep increasing output each year without resolving the supply/demand imbalance for the foreseeable future. The worst danger the sector could face is not a revival in small housebuilders increasing supply. Rather, a recessionary scenario where prospective buyers sit on their hands (as they did in 2007-9 when the housing shortage was already well established), would be most detrimental.
Download PDF

Subscribe today

Full access for just £3.37 a week:

• Tips and recommendations - to beat the market 
• Portfolio clinic & Mr Bearbull - build a well-planned portfolio 
• Expert tools - track and manage investments effortlessly
• Plus free delivery to your home or office

Subscribe Now