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Does a slowing housing market sound the death knell for these 2 stocks?

Photo: Jim Barton. Cropped. Licence: http://creativecommons.org/licenses/by-sa/2.0/

The housing market has been throwing off mixed signals lately, as has every other economic indicator since Brexit. So what is the outlook for these two property stocks?

Ton of bricks

House builders Berkeley Group Holdings (LSE: BKG) and Persimmon (LSP: PSN) were hit hard by the shock referendum result. Their share prices crashed and, unlike many other FTSE companies, they have largely missed the post-Brexit bounce. Today, Berkeley trades at 2,351p, some 28% lower than its pre-referendum price of 3,285p. Persimmon has picked up slightly in recent weeks, but at 1,691p is still 17% lower than on 23 June.

The market assumption is that Brexit will hit UK economic growth and housing market demand, which in turn will hit the house builders. So far, that hasn’t happened. In fact, the referendum has made it cheaper to borrow money and buy a property, thanks to the Bank of England’s 0.25% August rate cut. Yorkshire Building Society has just launched a record low deal charging just 0.98%, although only for remortgages.

House price crash dashed

Latest Bank of England figures show mortgage approvals hit a three-month high in September. The Office for National Statistics recently put the value of the average home at £219,000, up 8.4% in a year. There may be some signs of slippage at the top of the prime central London market, but generally, the UK market remains in robust state.

That may change when Prime Minister Theresa May actually triggers Article 50 and Brexit begins in earnest, but for now house prices have been faring far better than house builders’ share prices. This is either a case of the stock market overreacting, or else being more far-sighted.

It ain’t all Brexit

Berkeley has being hit by its greater exposure to the London market. However, it has reported that viewings and reservations have picked up after a wobble around the time of the referendum. The dip may partly be down to Berkeley’s decision to defer releasing new product to the market at that time. Other non-Brexit factors may also have played a role, such as the buy-to-let tax hikes made by former Chancellor George Osborne.

Persimmon has responded to Brexit uncertainty by announcing that it will spend less on new land, and focus more on developing its existing land bank, where it has enough supply to last for six years. Its caution is perhaps wise given current uncertainty, although it may disappoint more bullish investors.

Crazy days

House-building stocks have been on a tear since the post-crisis lows of March 2009, driven by record low mortgage rates and surging demand from a spiraling population. Persimmon’s share price is still 235% higher than five years ago. In that respect, it was due a fall. This has left Berkeley and Persimmon trading at tempting valuations of 8.88 and 9.91 times earnings, respectively. Berkeley’s forecast yield has hit a crazy 8.4% but cover of 1.9 suggests it could be sustainable. Persimmon’s yield is a forecast 6.4%, with cover at 1.7 times.

Years of double-digit earnings per share growth are expected to come to a juddering halt next year for both companies, so there will clearly be sticky times ahead. Mortgage costs can scarcely go much lower, and could even start rising. However, many will consider these risks are reflected in both companies’ lowly valuations and dizzying yields.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.