The UK’s largest housebuilders have enjoyed an unexpected recovery in their shares despite cutting back on development, as investors increasingly bet Britain will avoid a big fall in house prices.
In their most recent results, the three biggest developers, Barratt, Persimmon and Taylor Wimpey, all said that sales figures were improving and prices holding steady. Across the sector, share prices have rallied more than 20 per cent on average since January, according to Investec.
The market has also been cheered by the latest figures on house prices: earlier this week, mortgage provider Nationwide said they had unexpectedly risen between March and April, ending seven consecutive months of decline.
“The real reassurance for the stock market is that it looks like we’re going to avoid that big feared house price correction,” said Aynsley Lammin, analyst at Investec. “The general message from the spring selling season is it’s as good as you could have expected back in January.”
“The worst of the pricing adjustment appears to be behind us,” said Richard Donnell, executive director at property search website Zoopla. “The housing market is arguably more balanced between supply and demand than it has been for some years.”
HSBC last month upgraded its outlook for the sector, saying that despite lower profits in the coming years, shares looked attractive because the downturn was “more than priced in”.
Investors have also remained optimistic despite developers planning to cut the number of homes they build this year by about a quarter on average, after rising mortgage rates hit demand.
The focus instead is on a quicker than expected recovery from the financial chaos caused by the “mini” Budget in September, which prompted a number of lenders to abruptly withdraw from the market and pushed up mortgage rates in the longer term.
However, some industry watchers are less sanguine. The consultancy Capital Economics forecasts house prices, which are so far down 4 per cent from their peak, are only “part way through the correction” and will ultimately drop 12 per cent.
Investec’s Lammin said recent optimism could be a “false dawn” if employment or conditions in the mortgage market worsen. “If employment remains tight and the mortgage market remains supportive, then we probably are through the worst of it. But that’s a big if,” he said.
The fortunes of housebuilders are inseparable from prices of the wider housing stock. Big falls in the market would put them under pressure to cut the prices of new properties, which have so far held firm, propped up by incentives for buyers such as upgraded fittings and mortgage-free periods.
Analysts have been particularly focused on first-time buyers, typically a key source of demand for new homes, who face higher borrowing costs and the end of the government’s Help to Buy support scheme in March. Properties also continue to become less affordable relative to incomes, according to research by Zoopla. First-time buyers now need an annual household income of £55,900 on average to buy a three-bed house, up £7,350 from 2020.
Barratt, Taylor Wimpey and Persimmon all warned of the challenges facing first-time buyers in their recent trading updates, though Barratt also said big rises in rents supported demand and some buyers were increasingly choosing smaller first homes rather than staying in the expensive rental market.
Taylor Wimpey chief executive Jennie Daly said the drop in first-time buyer demand was not as bad as had been expected. “We have seen first-time buyer demand returning right from the [start] of the year,” she said. “It’s really important for the health of the whole market to have first-time buyers coming back.”
Still, housebuilding bosses remain cautious. Companies have not restarted land buying or expanded development, which they largely paused early in the year in response to lower demand after the September budget. Many groups have warned investors to expect lower profits in the coming year, and some have cut staff to reduce costs.
High inflation and planning constraints have also been a drag on the sector. Barratt said it expects building cost inflation will slow from around 10 per cent in the year to June to around 5 per cent over the next 12 months.
At the same time, the government watered down its housebuilding targets late last year. The Home Builders Federation, the trade body, has warned that current policy would lead to new home construction falling to the lowest level since the second world war.
Taylor Wimpey’s Daly said she would wait to see if sales continue to improve beyond the normally busy spring selling season to judge whether a recovery has truly taken hold.
