The Redrow (LSE:RDW) share price showed some interesting behaviour last week. After initially surging on Wednesday following the release of a trading update, the stock quickly plummeted on Thursday, only to rise again on Friday. Over the last 12 months, it’s up just over 40% despite the recent volatility. But the question remains, what caused these strange swings in the price? And should I be considering this business for my portfolio?
A promising start to a long recovery
Last week, Redrow published a trading update that looked quite encouraging to me. Home completions continued to rise despite disruptions in the materials supply chain. In total, 5,620 homes were built. That’s still less than 2019’s 6,443, but it’s much better than the measly 4,032 built in 2020. As a result, the management team forecast that revenue for 2021 will come in at £1.94bn. And while that’s also below pre-pandemic levels, it’s roughly 45% higher than last year.
The firm is also once again net cash positive, by £160m, making the balance sheet significantly healthier. But what I find particularly exciting is the reduced reliance on the soon-to-end Help-To-Buy scheme. In 2020, this government support programme accounted for nearly 50% of private reservations. But over the last six months, that figure has dropped to 13%.
Overall, it looks like the company is making good progress in its pandemic recovery. And so, I’m not surprised to see the share price jump on this news. But what caused the subsequent fall?
The falling Redrow share price
It seems that a new wave of uncertainty is washing over the homebuilding industry regarding stamp duty. To make homes more affordable last year, the UK government increased the threshold over which stamp duty takes effect to £500,000. This is undoubtedly great news for companies like Redrow, as it can sell its properties more easily.
However, since the start of this month, that threshold has fallen to £250,000. And by October will revert to its original £125,000. Meanwhile, interest rates are expected to increase in the near future to tackle the rising inflation levels. And the government’s Help-To-Buy scheme is also coming to an end in March 2023.
All of this is to say that the affordability of housing seems to be on a deteriorating path. At least in the short term. And that’s obviously not good news for Redrow’s profits or its share price. So, I can understand why some investors saw the recent surge as an opportunity to close their positions.
Time to buy?
The real-estate market has always been cyclical. However, the need for housing in the UK isn’t going away. The rising level of uncertainty is not a particularly good sign. But in my eyes, it’s ultimately a short-term problem.
The last time I looked at this business, my main concern was the firm’s over-dependence on government support schemes. But looking at the latest trading update, that no longer seems to be the case. Therefore, to me, the recent volatility does look like a buying opportunity for my income portfolio.