Is the housing market about to crash?

A warning from a major housebuilder has spooked the market. Should you sell?

| More on:

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.

Shares in retirement home builder McCarthy & Stone (LSE: MCS) fell by more than 10% this morning. The firm admitted that cancellations had risen since the end of June and warned investors of a potential slowdown in the secondary home market.

McCarthy & Stone’s financial year ended on 31 August. Although legal completions for the year rose by 20% to 2,299 units, McCarthy said that “higher levels of incentives” had been required to meet full-year sales targets

Virtually all of McCarthy’s customers have to sell a property before they can buy a retirement home. A slowdown at the top end could soon trickle down to include the whole housing market.

Lower mortgage approval rates also suggest the market could be slowing. According to data released by the Bank of England this week, mortgage approvals fell to 60,900 in July. That’s down from 64,800 in June, and is the lowest level seen for 18 months.

Jumping to conclusions?

In fairness, the summer period is always a slow one for the housing market. Until the autumn buying season gets under way, we won’t be sure whether the UK’s Brexit vote has damaged the housing market.

It’s also possible that a slowdown in the top half of the market won’t immediately affect first-time buyer demand for starter homes. These are often new properties, built to take advantage of the Help To Buy scheme. The government is targeting 200,000 new homes for first-time buyers by 2020.

Buy, sell or hold?

After this morning’s drop, McCarthy shares trade on a P/E of 10.9 and offer a forecast yield of 2.4%. Even if you’re bullish about the property market, I don’t see much attraction here. Several of the mainstream housebuilders have lower valuations, higher yields and bigger cash piles.

Better buys elsewhere?

Shares in both Persimmon (LSE: PSN) and Bovis Homes Group (LSE: BVS) fell by around 2% today after McCarthy’s statement was released.

However, these general housebuilders target a high proportion of first-time buyers and others who benefit from the government’s Help to Buy scheme. These public subsidies could make housebuilders’ sales more resilient.

Persimmon’s order book certainly looks much stronger than McCarthy’s. Persimmon reported forward sales of £1.75bn at the end of June. That’s equivalent to almost seven months’ sales at current rates. In comparison, McCarthy’s forward order book of £114m only represents 2.2 months’ sales.

Persimmon generated a 29% increase in pre-tax profit during the first half of this year and reported net cash of £462m at the end of June. This equates to 149p per share, meaning that the firm’s next dividend of 110p should be safely covered.

Bovis also reported strong cash generation during the first half, although the firm did warn of a slight slowdown in sales since the end of June.

My pick?

York-based Persimmon currently trades on 9.7 times 2016 forecast earnings, with a forward yield of 5.9%. Similarly, Bovis Homes looks affordable on 8.4 times forecast earnings, with a forward yield of 4.7%.

I’m not bullish enough about the housing market to invest in housebuilders’ shares at this time. But I do believe that firms like Persimmon could be a better option than McCarthy following today’s news.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

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

More on Investing Articles

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

2 of the best stocks to buy now with £500

I think that Berkshire Hathaway and Activision Blizzard are two of the best shares to buy today. I think they…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

I bought 10 cheap shares. Here’s what happened next

After recent price falls, we bought 10 cheap shares for extra passive income in future. This mini-portfolio offers a tasty…

Read more »

Close up view of Electric Car charging and field background
Investing Articles

Is now a good time to buy Chinese EV stocks as economic growth slows?

Chinese EV stocks tend to trade at a considerable discount to their US counterparts. And that's one reason I like…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

I’d happily start investing in today’s stock market – here’s why

The stock market has been moving up even as the economy has been looking shakier. Would our writer start investing…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Up 22% in a month! This FTSE 100 takeover target could rise further

A takeover bid for an FTSE 100 firm is big news. Here's what I'm doing about RS Group shares after…

Read more »

Young female analyst working at her desk in the office
Investing Articles

Income shares could help me turn £300 into £500. Here’s how

Our writer believes investing in the right income shares over the long term could be lucrative. Here is his approach.

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

I bought these FTSE 250 shares for fat dividends!

These two FTSE 250 shares have gained in value since I bought them recently. But I still see these stocks…

Read more »

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

Should I buy this REIT to add to the others that pay me juicy dividends?

Jabran Khan looks closer at this real estate investment trust (REIT) and decides if he would add the shares to…

Read more »