However, now that house prices have returned to their 2007 peaks — according to the latest Nationwide figures — I’m wondering whether it will soon be time for shareholders to lock in profits and sell.
Today’s housing market may not feel quite like it did in the heady days of 2007, but there are some similarities.
I’ve taken a look at five housebuilders’ post-tax profits from 2007, and after adjusting for inflation, compared them to current consensus forecasts for 2015:
|2007 net profit (inflation adjusted)||2015 net profit (consensus forecasts)|
|Barratt Developments (LSE: BDEV)||£360m||£414m|
|Bellway (LSE: BWY)||£280m||£176m|
Source: Company reports, Reuters consensus forecasts, UK RPI inflation data
There’s some variation between companies, but the total tells the story: analysts expect profits at the main UK housebuilders to reach or exceed 2007 levels in the next 18 months.
In my view, that’s a sign that the cyclic rebound from the 2008/9 crash is nearing its peak.
Although I don’t think a repeat of the financial crisis is likely, I do think that rising land, labour and materials costs are likely to combine with more conservative mortgage lending, rising interest rates, and limited wage growth and put pressure on housebuilders’ profit margins.
Currently, UK housebuilders all look extremely cheap, based on conventional P/E ratings and dividend yields. However, profits and dividend payments are heavily cyclical at these firms, meaning that these conventional valuation metrics aren’t appropriate, and can give a misleading impression of value.
In my view, a better alternative is to focus on the firm’s net tangible asset value — essentially its land bank — and then add a reasonable margin for the value added by building and selling houses.
The five housebuilders listed above currently trade at an average of 1.6 times their net tangible asset value. I reckon this is close to the sensible limit, as ultimately these firms’ profits are constrained by the value and availability of land.
Our five housebuilders have seen their share prices fall by an average of 16% since March. The result is that all five look very cheap on a forecast P/E and yield basis — and I reckon this could fuel a final surge in their share prices.
However, in my view, housebuilders’ share prices may already have peaked, and better growth opportunities are now available elsewhere.
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> Roland does not own shares in any of the companies mentioned in this article.