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The UK’s largest housebuilders have long complained about a lack of demand for their properties. After several years of above-inflation wage growth, hopes had been building that more people would finally be able to afford new homes. Knocking those hopes back down, however, has taken only a few weeks.
A dour trading update from Berkeley Group this week highlighted the potential damage if, as many economists fear, rising energy prices cause a period of stagflation. Berkeley said it would halt land purchases and slow the pace of construction on its existing sites to reflect slower sales. Its shares dropped 10 per cent after the announcement.
It is not alone in its struggles, with shares across the sector taking a battering recently. Northern peer Persimmon is also in danger of falling out of the FTSE 100, while larger rival Barratt Redrow is the worst performer in the benchmark index year to date. Another housebuilder, Vistry, has the bottom spot in performance terms in the mid-cap FTSE 250.
The weak economic outlook hits housebuilders several times over. Higher energy costs reduce consumers’ disposable income and knock confidence, while the prospect of higher inflation drives up the cost of borrowing for both the companies themselves and their customers. Indeed, the average interest rate on a two-year fixed mortgage had already jumped by 1 percentage point last month, according to Moneyfacts. A typical borrower with a £250,000 mortgage could expect to pay an extra £150 each month.
Even after the recent sharp declines, many housebuilders don’t look that cheap. Berkeley is now trading below its 10-year average on a forward price-to-earnings basis, according to S&P Capital IQ data, but is far from its lowest point. A sustained improvement, therefore, will probably require a genuine improvement in the profit outlook, not just a vibes-driven re-rating of the earnings multiple.
A new £16bn National Housing Bank, launched this week, may be useful in providing financing for construction but won’t address the demand squeeze. Housebuilders’ best hope is that market chaos prompts government to extend cheap loans to consumers, as it did under the old help-to-buy equity loan scheme. Builders have even suggested paying for it through an industry levy, which could make it more appealing for the cash-strapped UK government. Analysts at Barclays previously estimated that even an industry-funded version of help-to-buy could lift the sector’s 2027 ebit by more than 20 per cent.
A good estate agent can put a positive spin on any property, whatever the condition. That house isn’t tiny, it’s cosy. And the train line running overhead just highlights the great transport links. Housebuilding stocks, in this vein, might be said to have great potential. True, but it will take a lot of work before they look attractive again.