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What next for property stocks amid signs of market strain?

House prices are falling as concerns over interest rates hit demand

The average UK property price now stands at £286,532 down a modest £130 from April. Photo: Getty.
The average UK property price now stands at £286,532, down £130 from April. Photo: Getty. (Travelpix Ltd via Getty Images)

Shares in FTSE building companies slumped again on Wednesday as evidence of the slowing UK economy was further bolstered by new data reporting the first year-on-year decline in house prices since 2012.

It prompts the question, is it time to buy the dip with construction stocks trading in the red? Read on for an outlook and market overview on stocks in the sector.

Latest data impacting prices

Firstly, the lower share prices come off the back of the UK Halifax house price index for May coming in flat month-on-month, declining by 1% year-on-year.

It also follows data released on Tuesday that showed work on residential sites slipped in May to the weakest level since 2009 as building companies cut back on new homes with buyers struggling to manage high mortgage rates.

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The purchasing managers’ index for the construction sector showed activity in housebuilding at 42.7 in May, down from 43.0 in April. Anything below 50 is a sign that output is contracting rather than expanding.

Read more: UK house prices fall for first time since 2012

Construction stocks slump on data

The raft of new data sent shares in FTSE home building companies lower with Barratt Developments plc (BDEV.L), Redrow plc (RDW.L), Persimmon Plc (PSN.L), Taylor Wimpey plc (TW.L), MJ Gleeson plc (GLE.L), Vistry Group PLC (VTY.L), Bellway p.l.c. (BWY.L), and Berkeley Group Holdings plc (BKG.L) all trading in the red, at the time of writing.

“This was the first time since 2012 that annual house price growth came in below zero, highlighting the strain on the UK property market from the cost-of-living crisis, rising mortgage rates, and a sluggish growth backdrop. Property prices have shed £7,500 on average since the peak last August but are still higher by £25,000 than two years ago,” Victoria Scholar, head of investment at Interactive Investor, commented.

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She also noted how mortgage providers have been increasing their rates in response to the Bank of England’s inflation-combative rate hiking path.

Housebuilding sector stock performance

Aarin Chiekrie, equity analyst at Hargreaves Lansdown, gave Yahoo Finance an overview on the performance of stocks in the sector so far.

“The housebuilding sector’s enjoyed a strong run so far in 2023, posting average total returns of around 20%. A major driver in the strong year-to-date performance has been the housing market holding up better than many had previously feared.

Read more: Interest rate scare deflates UK house prices but rents on the rise

“Sales rates have generally improved compared to the end of 2022, but are still below the levels seen last year.

“In general, balance sheets within the sector look to be on fairly solid ground too. Healthy net cash balances have been boosted by the sector reigning in land spend and managing works-in-progress carefully.”

Outlook for stocks in the building sector

Chiekrie also shared with Yahoo Finance what he thinks is in store for housebuilding stocks for the rest of the year.

“Investors are understandably concerned about an impending recession, sky-high inflation, and rising interest rates – all of which can negatively affect affordability. The key question from here is just how much further affordability will get squeezed and what impact this will have on housing demand and house prices," he said.

Chiekrie noted how the new data from Halifax will no doubt hurt housebuilders’ top lines and highlighted that there has also been an increased use of incentives by housebuilders, particularly aimed at first-time buyers to prop up sales rates. However, he said it will inevitably eat into housebuilders’ margins.

“Build-cost inflation is another issue plaguing the sector and chipping away at margins. It’s been running hot at around 8-10% this year and shows little sign of easing in the short term.

“Given all the headwinds, expect a sharp fall in sector profits this year as volumes look set to drop by around 25% on average. If this happens, there’s the possibility that some housebuilders’ dividend policies could get revised downwards. We’ve already seen the likes of Persimmon slash its dividend. There’s potential for others in the sector to follow suit if costs aren’t kept under control as we move through the year,” the analyst added.

Looking further ahead

In the near term, Chiekrie pointed out that there are plenty of challenges for the sector to wrestle with, but said a lot of this uncertainty already looks built into the valuations. In the longer term, he said there are plenty of reasons to remain positive about the outlook for housebuilders.

"Brits are ideologically committed to home ownership and the nation has been in a prolonged period of housing undersupply – a trend that’s unlikely to change anytime soon. The limited supply provides some upward pressure to the falling house prices seen recently.

"For now, the sector generally looks to be in a resilient financial position. And many housebuilders currently have large land banks, meaning they can hike volumes again when the market turns. On a price-to-book basis, valuations in the sector remain some way lower than their long-term averages, suggesting there could be an opportunity for long-term investors willing to ride out near-term challenges,” he said.

Time to buy the dip?

Meanwhile, Naeem Aslam, chief investment officer at Zaye Capital Markets, told Yahoo Finance that the current sell-off of stocks in the building sector is an opportunity for investors.

“I think now is a good time to start positioning yourself to invest in the property market or if you want to buy these particular builders, for example Barratt Developments plc (BDEV.L) and Berkeley Group Holdings plc (BKG.L). If you are a speculator, there is still room left for these stocks to fall as the Bank of England (BoE) is still battling inflation, creating more market volatility which could have adverse effects on stock prices and real assets.”

Watch: Watch: How much money do I need to buy a house?

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