Will there, won’t there… be a housing crash? Judging by the share prices of housebuilders and estate agents since the Brexit vote in June, many have come up with the answer yes.
Berkeley Group Holdings (LSE: BKG) told us today that its reservations are 20% down on the same period last year, even excluding a hiatus in the immediate Brexit aftermath. The company put it down to “the market adjusting to increased stamp duty and the economic uncertainty arising from the result of the EU Referendum,” and I don’t see much EU-related certainty coming our way any time soon.
Still, the firm’s first-half financials looked good, with pre-tax profit up 34% to £392.7m, and net asset value per share up 7.9% to 1,418p. And perhaps the most encouraging sign was a near doubling in net cash to £207.9m, even after shelling out £137m in dividend payments and investing £20.1m in share repurchases.
That does suggest that the forecast full-year dividend yield of 8% is looking safer than some investors fear, and though the shares are up 6.2% to 2,703p, we’re still looking at forward P/E of only seven. That looks cheap… unless there really is a crash on the way.
Across the market?
The Brexit effect has hit the whole of the sector, with Taylor Wimpey (LSE: TW) shares also trading on a low valuation right now. There’s a forward P/E of around nine, which is a bit stronger, and the dividend for this year is expected to come in a little lower at 7.6%. On usual metrics that looks cheap too, with the shares down 22% since Brexit vote day.
We don’t have up-to-date figures from Taylor Wimpey, but November’s trading update told us that second-half trading has been strong, and that even with EU uncertainty “the housing market has remained robust and trading has remained resilient.” The central London market was said to have slowed, with top-range prices softening, but I think the majority of us would see that as a good sign overall — I know I want future generations to be able to afford to buy houses.
Full-year results won’t be with us until February, but there’s a further update due mid-January and hopefully we’ll know then whether there’s been a similar reservations fall to that seen by Berkeley.
What chance disaster?
I don’t see compelling evidence of a falling market just yet. Bovis Homes recently told us that the supply of new housing is still falling short of demand, but our medium-term economic outlook could well produce a fall in that demand.
For now, mortgage interest rates are almost stupidly low, but I can’t see this situation lasting that much longer.
Brexit, coupled with the fall in Sterling, is going to drive inflation up, and when that happens we’re surely going to see the end of the near-zero interest rates that the Bank of England is still holding in order to stimulate the economy. It’s the total monthly repayments that largely drive what people can pay for houses, and interest rate rises are geared towards pushing the cash left for repayments — and house prices — downwards.
But, even though I see a great chance that house prices will at least level off over the next couple of years, I still think housebuilder shares are oversold and that they’re nice long-term cash cows.