The recent headlines about falling house prices may seem concerning to potential property investors. According to the latest Nationwide house price report, prices have seen the fastest annual decline since 2009, with a 0.8% decrease from the previous month and a 5.3% decrease compared to August 2022. However, experts in the sector suggest that investing in shares of housebuilders could be a valuable opportunity, despite the current state of the property market.
The Current State of the UK Property Market
Last week, the Nationwide house price report had everyone’s attention. It revealed that house prices were falling at their quickest annual rate since 2009. To put this into perspective, in August, the average house price was 0.8% lower than the previous month. This translated to a 5.3% decline from the prices in August 2022, with the average price of a home dropping by approximately £14,600.
Robert Gardner, the chief economist for Nationwide, remarked, “The softening rate in house prices to -5.3% in August from -3.8% in July, marks the weakest rate since July 2009.”
This downturn isn’t entirely surprising for those closely observing the market. The considerable rise in borrowing costs over recent months has caused housing market activities to plummet below pre-pandemic levels. To support this observation, Gardner added, “Mortgage approvals have consistently been around 20% below the 2019 average, a trend that seems to continue according to recent mortgage application data.”
Furthermore, the house sales volume is also down significantly. Data from Nationwide points out that in the first half of 2023, home-mover completions with a mortgage fell by 33% compared to 2019 levels. First-time buyer numbers decreased by around 25%, and buy-to-let purchases involving a mortgage were nearly 30% below pre-pandemic levels. Notably, the only category not observing a decline was cash purchases.
What Major Mortgage Lenders Are Saying
Halifax, owned by Lloyds (LLOY) and recognized as the UK’s largest mortgage lender, was set to release its recent house price survey on 7th September. Many experts anticipate that this survey will echo the grim sentiments surrounding the housing market.
However, despite this sluggish market and decreased demand, especially after the discontinuation of the government’s Help To Buy scheme, sector analysts are advocating for a closer look at quoted housebuilders.
The Housebuilders’ Prospects
Berenberg’s analysis suggests that while they expect a 30% reduction in new-build activity this year, 2024 is anticipated to witness a more stabilized market. They argue that despite the current gloom, the sector is enticingly valued. They believe that the lowest point of earnings hasn’t been reached yet, but they anticipate it will be reflected soon in consensus forecasts.
Two stock picks stood out from Berenberg’s recommendations:
- Berkeley (BKY): Recognized as “best in class” across the sector, it’s believed to offer compelling value over the cycle.
- Crest Nicholson (CRST): It’s touted as having the most affordable outright valuation.
On the other hand, Liberum is optimistic about the housebuilding sector, foreseeing over 20% total shareholder return. This sentiment hinges on the continuation of declining mortgage rates. They are particularly bullish about MJ Gleeson (GLE) and expect its upcoming results on 14th September to show significant resilience. This implies that its growth rate during the recovery could be one of the fastest.
Wrapping It Up
While the current climate of the UK property market may seem bleak, investors shouldn’t be quick to dismiss the potential of housebuilders. The insights from sector analysts suggest that there may be opportunities amidst the downturn. As always, for those considering investments, thorough research and consultation with financial advisors are paramount. The property market, with its cyclical nature, always presents challenges, but for the astute investor, it may also offer rewarding opportunities.