Why builders will be a good bet after Brexit: Ultra-low mortgage rates will help Britons looking to buy a home

The housebuilding sector is still licking its wounds from the EU referendum. 

Share prices have recovered from the depths plumbed in the immediate aftermath of the Brexit vote, though most are still more than 10 per cent shy of their pre-referendum valuations.

Indeed, Berkeley Group shares have fallen behind so much the company has lost its place in the FTSE 100, thanks to concerns over the housing market.

Going up: Whether we are part of the European Union or not, Britons are still going to want to own a home, and will be aided and abetted in that endeavour by ultra-low mortgage rates

Going up: Whether we are part of the European Union or not, Britons are still going to want to own a home, and will be aided and abetted in that endeavour by ultra-low mortgage rates

These concerns may or may not ultimately turn out to be well-placed, but they certainly aren’t so far being reflected in the trading figures posted by companies in the sector.

Both Barratt and Redrow this week posted strong annual results to the end of June, and more importantly reported that trading had been robust since June’s referendum.

Clearly it’s early days, and if the Bank of England is to be believed, the economic slowdown it has forecast will reach its nadir in 2017. 

Mortgage approvals did slip to 61,000 in July, down more than 10 per cent on last year.

This is significant because approvals are regarded as a leading indicator of house prices, though very little can be gleaned from just one month’s figures.

Particulaerly in July, this is when many potential house buyers might well have paused to take stock after the referendum, and may yet ultimately follow through with their transactions.

Whether we are part of the European Union or not, Britons are still going to want to own a home, and will be aided and abetted in that endeavour by ultra-low mortgage rates, and government schemes like Help to Buy.

Figures from the Nationwide for August suggest house price growth is still running in excess of 5 per cent a year.

On the supply side of the coin, things look supportive of property prices too.

The Government estimates that around 220,000 new houses need to be built every year until 2021 to meet demand from new households being formed.

Currently 120,000 homes are being built each year, which means a shortfall of half a million homes in the next five years if that trend is maintained.

Supply may even face new headwinds. Housebuilders may now be more selective in the land they develop into housing, thanks to the more cautious outlook for the economy. The sector as a whole is taking a more disciplined approach to development.

Having felt the burn during the financial crisis, they are now looking to enter the next downturn in better shape.

Berkeley Group, which focuses primarily on London development, has also explicitly warned that government policies are focusing too much on stimulating demand, and not enough on boosting supply. It now predicts London will fall well short of its target for new homes.

All of these supply side pinch points suggest upward pressure on housing prices, which should help towards offsetting any negative sentiment if an economic downturn does materialise.

This won’t comfort those savers still trying to get on the housing market, particularly now their cash is remarkably getting an even lower return thanks to the recent interest rate cut from the Bank of England.

However, it does suggest things may turn out better than expected for the housebuilders.

For investors in this sector, there is also the prospect of significant returns of capital in the coming years to pique their interest.

Berkeley for example, is planning on returning £10 a share to investors over the next five years, while Persimmon intends to return £5.50. 

These returns may be curtailed if we get a severe downturn, but so far the house builders look to be standing firm on their promises. 

This means the sector is offering investors a pretty attractive yield, which is not to be sniffed at when cash and gilts are yielding next to nothing.

Clearly there are risks for housebuilders, not least because they are cyclical, and so bad economic news will mean share prices take a hit. 

Given the uncertainty thrown up by Brexit, it’s easy to be bearish about prospects for the housebuilding sector right now.

But at the same time, lower expectations leave more room for positive surprises.

■ Laith Khalaf is a senior analyst at the investment supermarket Hargreaves Lansdown

 

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