Of all Margaret Thatcher’s achievements, I think her idea that people should own their own homes ranks alongside monetarism as one of her best. If you buy houses, you’re automatically building a store of wealth for you, your family and your descendants. It’s the reason why, per capita, the UK is one of the wealthiest nations in the world.
House price boom
The downside of this is that, if everyone is buying property, not just as a roof over their head but to let out and as an investment, prices are inevitably going to rocket. This has divided Britain into a nation of haves and have-nots: those who own property, and those who rent.
House prices fell during the Great Recession, but are now recovering strongly. The dinner party conversation has moved from being about whether property prices will rise, to just how far they’ll go, and how unaffordable they are. I think they have quite some way further to rise. That’s good news for the haves, not so good for the have-nots.
But this burgeoning market means that housebuilders such as Barratt Developments (LSE: BDEV), Persimmon (LSE: PSN) and Berkeley Group (LSE: BKG) have been raking it in. And their share prices have been heading skyward.
You may be kicking yourself for not buying into these companies during the dark days of the Credit Crunch (I certainly am), when they were ridiculously cheap and nobody would touch them with a barge pole. But with house prices set to rise much further, you’ll kick yourself even more as I suspect the profitability of these firms, and their share prices, will increase too.
Building growth
A swift assessment of earnings growth shows why these businesses should be of interest to you. Let’s start with Barratt Developments. Earnings per share are expected to shoot up from 7.5p in 2013 to 58.55p in 2017. The 2016 P/E ratio is forecast to be 11.68, falling to 10.69 in 2017, with a dividend yield of 4.89%, rising to an impressive 5.96% the following year. Thus the gathering momentum means this company is still cheap, and has an attractive dividend yield to boot.
Persimmon has a similar progression, with earnings in 2012 of 54.90p per share likely to surge to 173.69p per share in 2016. For this builder, the 2015 P/E ratio is expected to be 12.92, falling to 11.67 in 2016, with an income of 4.69% rising to 5.28%.
While Barratt and Persimmon have developments all across the country, the appeal of Berkeley is that much of its business is in the resurgent London and the South East. That’s why its share price has pushed a little further ahead of its peers. Analysts think earnings per share will go from 140.30p in 2013 to 370.26p in 2017. The forecast 2016 P/E ratio is 15.99, falling to 9.96 in 2017, with a dividend yield of 5.42%.
The bottom line is that there’s a lot further to go in this housing boom. Though you may not have got on at the ground floor, it’s still worth buying into any of these building firms as they climb higher in 2016.