Never underestimate the lengths a chancellor will venture to prop up the UK housing market. It is a point to consider for anyone contemplating just how long the furious rise in activity will continue. Case in point - the extension of the stamp duty break to the end of September. The tax break has reinvigorated demand and fuelled an acceleration in the rate of sales price growth to 7.1 per cent in April, according to lender Nationwide, just a sliver below the six-year peak hit in December.
For Barratt Developments (BDEV), a booming market has prompted management to lift guidance to between 16,000 and 16,250 completions this year, up from the 15,250 to 15,750 homes expected in February. The net private reservation rate per active outlet has averaged 0.83 a week since the start of 2021, a natural jump from the anaemic rate of 0.52 recorded during the same time last year, when the market was plunged into lockdown. Yet the pace of reservations has also quickened since the second half of last year and is above 2019 levels.
Analysts have responded accordingly, upgrading earnings forecasts not just for this year, but out to 2023. That leaves shares in Barratt trading at 1.8 times forecast tangible book value at the end of June, or 12 times forward earnings for the 2021 financial year. The former might be below a post-referendum peak multiple of 2.1, but is markedly above a 10-year average of 1.4. The latter metric is also within touching distance of the near six year-high reached in February. Investors are betting on the good times rolling, but they would do well to temper enthusiasm.
Some confidence is not unfounded; government policy has been a powerful ally to the sector. In a nod to how vital stimulus has been to the rate at which new homes are churned out, Barratt chief executive David Thomas cited the deadline for the original help-to-buy scheme and initially slated end to the stamp duty break, both of which fell on 31 March. Completions were 6 per cent higher than the pre-pandemic level recorded in 2019.
Yet in the near-term, any further government efforts to lure buyers into the market once the stamp duty holiday ends, seem unlikely to be as generous. In March, the Treasury predicted that the cost of the extension alone would amount to £1.6bn.
While post-pandemic efforts have been centred around boosting demand, a far more crucial determinant of whether the fortunes of the UK’s housebuilders will continue to be rosy is what shape government efforts to encourage supply take. The help-to-buy scheme, which is due to end in March 2023, has turbo-charged completion levels and shareholders returns since it was introduced in 2013. Yet a wave of bad publicity around the quality of new build housing might see new conditions attached to that support in future.
Stimulus aside, there could be further headwinds to demand. The availability of mortgages at higher loan-to-value ratios remains restricted for new build homes, a part of the market where lender fears of a fall in property values are more acute due to the premium built into initial sales prices. While the Bank of England has reduced its forecast for unemployment to peak at 5.5 per cent this year, down from the 7.75 per cent previously anticipated, the extent to which joblessness will limit activity is still unclear. And the oft-cited pent-up demand among buyers - assuming it's a reality - will dissipate over time anyway.
None of the potential challenges have dimmed investors’ optimism in Barratt Developments or its peers, which have enjoyed similarly heady rises in valuation since the path out of lockdown was laid by the vaccine rollout. An expected net cash pile of around £1bn by the end of June also bodes well for dividends, which consensus forecasts at 26.5p a share this year and 37.3p in 2022.
Barratt was among a wave of those in the UK property sector to benefit from the shift towards cyclical shares in recent months. However, the shares are starting to look fairly valued by the market. Further positive headlines around housing transactions and prices are likely in the coming months, but that does not guarantee that the pace of share price gains will be maintained indefinitely. At 782p, hold.