Property stocks are among the biggest FTSE 100 gainers today. Taylor Wimpey, Barratt Developments, and Persimmon are all up around 3%. After some softening in their share prices over the past few weeks, I reckon this is a good opportunity for investors to buy as the property markets continue to look positive.
Robust housing demand
According to property e-marketplace Rightmove, the housing market continued to strengthen in May. The average price of property coming to market jumped by 1.8% to a record £333,564 compared to the month before. This is the most up-to-date house price index available right now.
This house price increase is also reflected in FTSE 100 property companies demand, as per their recent updates. Barratt Developments recently reported robust forward sales numbers, which refer to sales of homes that are still under completion. In fact, it is fully forward sold for the current financial year. Similarly, Persimmon reported forward sales for the January-April months as 23% above the same time last year and even 11% higher than those in 2019. Taylor Wimpey too has seen resilient customer demand.
My concerns for the property market
My concern, however, is that the housing market has been supported by a unique conditions. These include significant government support, low interest rates, and possibly even higher savings among UK’s households. These are about to change. Government support, like the stamp duty relaxation, will be withdrawn later in 2021. With inflation on the increase, I think it is only a matter of time before banks start raising interest rates. This means that housing loans will become more expensive.
Also, as we come out of lockdowns, I reckon household savings can come off. They rose to record levels last year as a proportion of income as lockdowns limited possible spending. High savings are instrumental in buying assets like houses or stocks. But with pent up demand for leisure activities from cinemas to holidays, consumers are expected to start spending more. In other words, there could be a reallocation of funds towards higher spending.
What is next for these FTSE 100 growth stocks?
This means that the housing market could soften in the near future. This in turn would have a bearing on FTSE 100 property stocks, raising the question – can their prices continue to rise?
I think they can. There is no doubt that their share prices have risen over the past year. Barratt Developments, for instance, has seen an almost 50% increase. Persimmon has seen a 35% increase and Taylor Wimpey is up almost 14%.
But in relative terms, they are still inexpensive, with price-to-earnings (P/E) ratios ranging between 15 and 28 times. Considering that their results will only improve going forward as well as some continued bullishness in investor sentiment, I think they are growth stocks with potential.
Further, economic recovery is expected to be sharp. This should soften some of the blow from the withdrawal of the stamp duty waiver and rising interest rates. I would keep an eye out for house price developments to assess the situation over time, because they reflect underlying demand.
When I next buy cyclical stocks, though, I will have them on my wish list.