It seems like only days ago that everyone was panicking over soaring house prices in London, and the Bank of England was considering an early interest rate rise to try to cool the property market — oh, wait, it was only days ago.
In fact, in a Bloomberg survey published Monday, 85% of economists polled said the Financial Policy Committee should enact measures to cool the market.
London falling
But look what’s happened now — shock, horror, the market in London is cooling!
The latest information from Rightmove suggests that price rises across the country are slowing, and that prices in London have actually started to fall back in June. Fears of that possible interest rate rise from the BoE have helped to cool demand, the property website operator suggests, but there has also apparently been a 20% rise in the number of houses coming on the market with a lot of people trying to sell at the top.
London prices dropped by 0.5%, which would have been unthinkable to those who seem to believe prices in the capital can only go up.
The faraway towns
Country-wide there’s been a much slower rise over the past year, but prices rose by just 0.1% in June — down from a 3.6% rise the month before.
What does that mean for investment in our top housebuilders?
Shares in Persimmon (LSE: PSN), which were up above 1,470p in February, are now trading at just 1,188p — after a 2% drop on the day the slowdown news was revealed. An investment in Persimmon three and a half years ago would have earned you a nice three-bagger and more — but over the past 12 months the price is down 3%.
The picture is very similar at Barratt Developments (LSE: BDEV), although the reversal in the course of a year has been more pronounced — up to 450p earlier in 2014, and now down to 343p. And there’s a three-bagger again over the same period, followed by the slowdown.
Too expensive now?
So have our housebuilders run out of steam?
Well, if you wanted to get in on the serious undervaluation of their shares in recent years, it might still not be too late.
Even after those massive share prices of the past few years, Persimmon is still trading on a modest forward P/E of 10.8 based on forecasts to December 2014, dropping to just 8.8 on 2015 predictions — and there’s the second big special dividend, of 70p per share this time, to come in July.
Forecasts for Barratt suggest a doubling of earnings per share this year, with a further 39% to come for 2015 — putting the shares on very similar P/E multiples of 11.8 falling to 8.5 for the next two years. Dividends are coming back strongly at Barratt, too, with a yield of 2.8% this year expected to rise to 4% next.
Not a bit of it
So are housebuilders overpriced now? Not by a long chalk.