Property prices in the UK have leapt in recent decades and profits at FTSE 100 housebuilders have subsequently soared.
Ultra-low interest rates since the 2008 financial crisis have helped supercharge homebuyer affordability and thus demand. Home construction rates meanwhile have been seriously low due to a lack of cohesive housing policy at government level.
I’m tipping these phenomena to remain in place for years to come. And so I believe UK shares like Persimmon (LSE: PSN) remain attractive investments today.
Stunning all-round value
I’ve bought shares in this particular housebuilder in recent weeks. I purchased it to sit alongside other FTSE 100 builders Barratt Developments and Taylor Wimpey in my portfolio.
The excellent value Persimmon provided was simply too good for me to ignore. The company’s share price has slumped 35% since the beginning of 2022. And it’s continued falling since I bought in, providing even better bang for an investor’s buck.
At £18.60 per share, the company trades on a forward price-to-earnings growth (P/E) ratio of 7.2 times. Meanwhile, its dividend yield sits at a titanic 12.5%.
Interest rate risks
Persimmon and its peers have fallen heavily in 2022 as the Bank of England has aggressively raised interest rates. At 1.25%, it’s now at its highest since around the time of the financial crisis 14 years ago. And policymakers have signalled further aggressive action to tame the problem of runaway inflation.
The impact that this could have on the homes demand — by reducing homebuyer affordability already struck by the cost-of-living crisis — could be significant.
House prices keep soaring
A flurry of interest rate rises has indeed seen some cooling of house price growth data more recently. But, pleasingly for Persimmon et al, the value of residential properties continues to rise at an impressive rate. Latest data from Nationwide showed average annual home price growth clock in at 10.7% in June.
A highly-competitive mortgage loans industry is helping to mitigate the impact of higher rates on homeowners’ budgets. So is the fact that interest rates still remain way below historical norms and are likely to remain in this area.
A robust outlook
What’s more, Savills believe that the impact of future interest rate rises will be offset by changing affordability rules for lenders.
The estate agent says that:
The effect on buyer affordability will be mitigated by the announcement that mortgage regulation is to be relaxed from August. This is likely to give more capacity for house price growth over the medium term.
Government inaction
It’s my opinion too, that price growth will remain as governments fail to get their act together on housebuilding. The search for the 21st housing minister since 1997 is now on following the resignation of Stuart Andrew this week.
Given this rapid turnover of staff its no surprise that housebuilding policy remains so patchy. And it will take time for the government to truly get to grips with the country’s homes shortage by drawing up a cohesive building strategy.
As a consequence, I think the outlook for Persimmon and those other FTSE 100 housebuilders remains super bright. I think they could help supercharge the long-term returns I receive from my shares portfolio.