Although this year I’ve been strongly advocating shares as a long-term investment as global equities start to rise, it’s hard to argue against rising house prices. Even if you buy shares, you should have a substantial amount of your money in Britain’s housing boom.
Property prices have been climbing for ages in the UK. And many have used their savings and inheritance cash to buy into buy-to-let. Yet taxes have been rising on buy-to-let, as the government has tried to raise as much money as it can from this growing sector.
Investors rushed to beat the April deadline
On 1 April, stamp duty on buy-to-let was hiked 3%. This led to a last-minute rush from investors to buy properties. Rightmove reported that house sellers’ asking prices jumped to a record high of £308,151. Miles Shipside, director of Rightmove, said that this sudden rush of purchases had resulted in “a famine of suitable property and higher prices“.
It’s basically a case of supply and demand, as the lack of houses and flats on the market has meant that sellers have been able to push up their prices.
This is of course good news for the housebuilders, notably Barratt Developments (LSE: BDEV) and Persimmon (LSE: PSN). Both these companies have made the most of the house price recovery after the slump caused by the Credit Crunch, building up their stock of land during the recession and then selling more property during the recovery.
Resurgent property prices and an increasing number of transactions have led to a rapid increase in the earnings of these firms, and the share prices have consequently been on the up.
House builders still look cheap
Yet Barratt Developments’ 2016 P/E ratio is still only 9.9, and there’s an appealing 5.7% dividend yield. The share price is off its highs, and this might be the perfect time to invest.
Persimmon has also been doing well, and despite the rising share price it’s still on a 2016 P/E ratio of a shade under 10.5, with an income of 5.6%.
Thus these companies exhibit the ideal combination of growing profitability and an attractive dividend.
The main cloud on the horizon is the EU referendum on 23 June. The latest opinion polls show that this is balanced on a knife-edge. Uncertainty may mean that some people delay their purchases, and over the next few months, this is likely to slow the housing market’s momentum.
Yet even if Britain leaves Europe, people will still want to buy houses, and a strengthening UK economy, increasing population and a bubbling jobs market mean that over the next few years, I expect property prices to continue to climb. This trend has a long way to run.
That’s why I rate both Barratt Developments and Persimmon as buys.
