Mortgage rates are starting to fall. The new government is promising a housebuilding boom.
Is it time to consider buying shares in UK housebuilders ahead of a sector recovery?
In this piece I’ve taken a look at the issues affecting the sector and the current state of the UK’s main listed housebuilders. Read on to see why I think these companies could be worth a closer look at current levels.
Politics or business?
It’s hard to separate the UK’s housing market from politics.
In the aftermath of the 2008 financial crisis, the Help to Buy Scheme helped to prevent a logical market correction. Instead, it unleashed a decade-long surge of house price inflation. Prices were driven even higher by the rocket fuel of ultra-low interest rates – unprecedented at any point in modern UK history.
Source: Bank of England (July 2024)
Big housebuilders were prime beneficiaries of this policy. They enjoyed what I would describe as abnormal profit margins for many of these years.
However, when interest rates started rising in 2022, the cycle started to turn. Higher borrowing costs had a predictable impact on affordability.
UK-wide sales completions are reported to have fallen by 19% in 2023. This drop has also been reflected in the output of most of the big housebuilders.
For example, mid-market builder Barratt Developments (LON:BDEV) saw its output fall by nearly 20%, to 14,004 homes, during the 12 months to 30 June 2024.
Has the market bottomed out?
In the recent election, planning bottlenecks, high land costs and a shortage of new housebuilding were key campaigning issues for Labour.
The party has promised to unblock the system and build 1.5m new homes before the next election, equivalent to 300,000 per year.
The new government’s plans have not yet been fleshed out in any detail. But I think it’s fair to assume that if interest rates fall and the economy strengthens, housebuilding activity could increase regardless of government action.
Barratt’s latest guidance is for a further fall in output to between 13,000 and 13,500 completions in 2024/25. A recovery is expected from the following year.
It will certainly take time for demand to recover…
