Recent initiatives to address the housing shortage in the UK have tended to focus on introducing measures to promote more social housing. This is probably the right way to go because traditional private home builders are never going to close the gap between supply and demand. Local authority sponsored construction would help to resolve the problem considering that in the late 1960s council home completions were topping 400,000 a year as opposed to virtually nothing at the moment. Measures in this year’s Budget to allow local authorities to borrow to build is at least a step in the right direction.
How this will affect the likes of Barratt Developments (BDEV) and Taylor Wimpey (TW.) remains to be seen. If social housing construction accelerates at any meaningful rate, it could push land prices higher. However, the government has been long on rhetoric but rather short on real action. Pledges to provide more finance for local authorities and housing associations are unlikely to lead to an acceleration in social housing construction overnight. In fact, the pledge to build 300,000 homes a year doesn’t kick in until the mid 2020s. And by 2022, the housing shortfall is expected to exceed 1m homes. It’s also worth pointing out that land supply should start to increase as a result of the government’s national planning policy framework. But money lay at the root of the housing shortage. Local planning procedures were introduced in 2014 whereby local authorities presented a plan to build houses, but 70 still have no plan after nearly four years, and 15 are now under a formal process of intervention by the government. Further injections as announced in the Budget will help, but it will all take time.
So where does all this leave the big housebuilders? At first glance it might seem to be fairly safe to suggest that the New Year will bring pretty much more of the same, with overall output moving modestly higher. However, there are potential pitfalls, although it is unclear whether these will make a material difference. One concern is that with rising land and labour costs and shrinking house price inflation, margins could be squeezed. As a rule of thumb, this is unlikely to happen as long as cost price inflation remains less than double house price inflation. House price inflation has moderated, but it’s hard to see this slowing much further, given that demand remains strong, especially now with the abolition of stamp duty for first-time buyers on the first £300,000. And for potential buyers, the Help-to-Buy scheme remains intact, while mortgage rates are historically low. Furthermore, government initiatives to free up more land are expected to keep land price inflation relatively benign. Ultimately, profits could be protected by spending less on new land, using the existing land bank instead. This would only be a short-term measure unless there is real progress in simplifying and standardising the planning process. If consented land were to be made more readily available, it would reduce the need to carry such a long land bank.
Another potential worry is a new review into Help-to-Buy, with the current scheme due to finish in 2021. Given that around 40,000 first-time buyers use this every year, it seems unlikely that the government will call a halt. There may be some modifications, however. The current scheme sees home buyers put down a 5 per cent deposit which the government tops up with a 20 per cent loan; the balance of the purchase price coming through a mortgage. It’s possible that the amount of the government loan could be trimmed back, while the maximum purchase price could be reduced too. And another worry is what will come out of the review on alleged hoarding of consented land.
Ultimately, the greatest concern is how the economy is affected by Brexit. The Bank of England has warned that UK growth will be constrained while uncertainty continues, and growth levels have been cut back. Unemployment remains low, but so do productivity levels. Further on the downside, inflation continues to outpace growth in average earnings.
Overall, the year ahead will probably see house price inflation slow a little, although the most recent data presents some doubt about how much of a slowdown there will be. However, it is crucial that selling price inflation remains sufficient to cover higher build costs, while profits will be underpinned by higher output levels of around 5 per cent. Housebuilders have had a really good run since recovering after the financial crash, and there are some very stretched valuations that could easily unwind if the good news starts to dry up.
| Market Cap (£bn) | Share price (p) | Year-on-year change (%) | Dividend yield (%) | Price/NAVPrice/NAV 2018 | Price/NAV 2018* | |
| Barratt Developments | 6.16 | 608 | 31 | 4.1 | 1.57 | 1.68 |
| Bellway | 4.33 | 3527 | 46 | 3.5 | 1.83 | 1.64 |
| Berkeley Group | 5.18 | 3817 | 57 | 3.7 | 2.11 | 2.08 |
| Bovis Homes | 1.5 | 1118 | 37 | 4.1 | 1.41 | 1.5 |
| Countryside Properties | 1.63 | 362 | 57 | 2.4 | 1.87 | 1.89 |
| Crest Nicholson | 1.3 | 510 | 16 | 5.9 | 1.54 | 1.43 |
| Galliford Try | 0.98 | 1184 | -5 | 8.3 | 2.34 | 2.08 |
| McCarthy & Stone | 0.88 | 164 | -2 | 3.4 | 1.23 | 1.2 |
| Persimmon | 7.99 | 2586 | 53 | 5.3 | 2.82 | 2.72 |
| Redrow | 2.23 | 603 | 47 | 2.9 | 1.43 | 1.57 |
| Taylor Wimpey | 6.39 | 195 | 34 | 2.4 | 2.07 | 2.03 |
| Telford Homes | 0.31 | 417 | 33 | 4.1 | 1.32 | 1.24 |
| *Peel Hunt forecasts | ||||||
A downward correction is likely if investors follow the old cyclical rules that dictate buying housebuilders on the recovery and dumping the shares at the first hint of change in the cycle. During the financial crash that made a lot of sense, but this time around there are key differences. Mortgage rates are at historic lows, but lenders are not throwing out mortgages like confetti; there is much greater regulation. And unlike last time housebuilders have extremely strong balance sheets. But there is always a risk that sentiment rather than fundamentals will be a driver for how shares in housebuilders perform.
