Housing Market Pickup Is Great News For Lloyds Banking Group PLC

Improvements in the outlook for UK housing make me want to buy Lloyds Banking Group PLC (LON: LLOY).

Peter Stephens

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 18 September, 2013 9:25 am BST

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Looking back on the credit crunch, I’m sure my fellow Fools will agree with me when I say that interest rates were too low for too long.

Certainly, inflation was not a major problem; however, asset bubbles caused by the availability of cheap credit simply got out of control and, when they burst, the ensuing chaos was years in the making.

So, I was slightly concerned to read recently that the new Governor of the Bank of England, Mark Carney, has made yet another attempt to convince the market that he and his colleagues will keep interest rates at historic lows for three more years.

The end result, in my view, will be yet another housing market bubble and, when combined with policies such as the Help To Buy scheme, it looks to me as though we are simply setting ourselves up for more problems ahead. The expression ‘kicking the can down the road’ inevitably springs to mind.

However, there is little point in sitting around complaining about house price bubbles. In fact, for private investors like me, such a bubble could actually be a good thing.

Indeed, a rising UK housing market would be great news for Lloyds (LSE: LLOY) (NYSE: LYG.US). It inherited a vast mortgage book when it acquired HBOS in the midst of the financial crisis.

Not only would it mean that fewer people would be in negative equity (and, therefore, in a less precarious financial position), it would also mean more mortgages to sell as housing market activity picks up.

So, while part of me despairs at the commitment to low interest rates, another part realises that it could actually be a case of giving with one hand (a better situation for Lloyds) and taking with the other (continuing dismal savings rates for income-seeking investors like me).

However, on the topic of income, the commitment by Lloyds to pay out 65% – 70% of earnings as dividends within three years may actually mean that low interest rates are a good thing if they can help Lloyds to become more profitable.

With earnings expected to reach 6.6p per share next year, it puts Lloyds on a yield of around 3.1%, rising to over 6% by 2016.

Furthermore, shares trade on a forward price-to-earnings (P/E) ratio of just 14.5, which compares reasonably well to the FTSE 100 on 15 and very favourably to the banking sector on 16.7. And, with the government announcing the sale of a 6% stake, news flow could also be positive in the short run, too.