It seems as though everyone has an opinion on where the UK housing market is headed to next. Many people think that house prices are bound to fall, simply because they’ve gone up so much and that higher interest rates will hurt demand. However, others think that a lack of supply and high demand will mean house prices continue their upward trajectory.
Strong Numbers
Certainly, house prices seem to be continuing their upward trajectory for now. Indeed, results released by Persimmon (LSE: PSN) this week show that the housing market and, in particular, the housebuilding industry remain highly lucrative. Evidence of this can be seen in Persimmon’s bottom-line numbers, where profit increased by 61% in the first half of the current year as the company sold 28% more homes than it did in the first half of 2013.
Allied to this is an increase in the price of houses sold of 4.3%, which shows that the marketplace seems to be buoyant. However, what could really make a difference in the long run, irrespective of whether house prices continue their upward trajectory, is the fact that Persimmon has increased the number of plots of land it owns by 16% versus the first half of 2013. This is great news for shareholders, since it means the company has the potential to keep on delivering growth over the longer term.
Growth Potential
However, the first-half of the current year doesn’t look set to be a ‘flash in the pan’ for Persimmon. For instance, in 2015 the company is forecast to increase earnings by 22% which, although less than the current rate of growth, is still more than three times the FTSE 100’s expected growth rate. Indeed, with inflation coming in at just 1.6% last month, interest rate rises may not be as brisk as many investors are predicting, which could mean that demand for housing remains strong.
Prime Properties?
Clearly, Persimmon tends to concentrate on family homes that are in the mid-price point range. Although this space has huge potential, prime properties could prove to have the scope to continue their recent price gains – especially if interest rates stay low and sterling remains weak. With this in mind, Berkeley Group (LSE: BKG) could complement Persimmon in a portfolio, since it offer exposure to a higher price point that is more focused on London, which tends to lead the rest of the country when it comes to house price rises.
Looking Ahead
Despite their potential for strong growth, Persimmon and Berkeley Group trade on very reasonable valuations. For instance, Persimmon has a price to earnings (P/E) ratio of just 11.8 and Berkeley Group has a P/E of just 11. Both of these numbers are well below the FTSE 100’s P/E of 13.4 and show that, while house builders have potential, they are not overpriced.
As for whether Persimmon is the top housebuilder on offer, there appears to be huge opportunity in this space at the moment and, as ever, diversifying between Persimmon and Berkeley Group could prove to be a potent combination.