Is this the calm before the storm for UK house prices?

Are UK house prices about to fall?

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Today’s update from housebuilder Bovis (LSE: BVS) shows that the UK housing market continues to perform well. The company reported a rise in both volumes sold and prices attained in 2016, which shows that even the prospect of Brexit has not slowed the property market down.

But could this prove to be the calm before the storm?

Considerable uncertainty

Bovis’s update states that housing supply continues to fall short of demand. This helped to increase its average sales price during the year by 10%, while its legal completion volume is set to be 5% higher than last year. Furthermore, Bovis believes that the political environment is conducive to a buoyant housing market, with the extension of the Help to Buy scheme and improved planning process being evidence of this.

However, the outlook for Bovis and the rest of the UK housing market continues to be uncertain. Although there is a shortage of housing, its affordability is difficult to justify. Interest rates are now almost zero and may need to increase over the medium term in order to curb higher inflation. Additionally, a boost to the UK economy from a weaker pound may lessen the need for low interest rates, which could cause the Bank of England to adopt a more hawkish standpoint. This could reduce demand for housing through a lack of mortgage affordability.

In addition, the UK housing market faces the threat of Brexit. While there has been a modest impact on house prices since the EU referendum, the reality is that Brexit has not yet started. Once the government invokes Article 50 of the Lisbon Treaty, a period of considerable uncertainty is likely to commence. The EU and UK are likely to be tough negotiators, and things such as access to the single market may seem unlikely at times during the two-year negotiation period. This could affect confidence in the UK economy and cause foreign and domestic buyers to delay purchases of property.

A tough outlook

Despite this, Bovis and other housebuilders such as Bellway (LSE: BWY) continue to have investment appeal. In Bovis’s case, today’s update shows that it has a sound balance sheet with a net cash position, as well as a large land bank for development in future years. Bovis is forecast to increase its bottom line by 15% this year, although it is due to fall back by 5% next year. Similarly, Bellway has a tough outlook, with its earnings expected to flat line in the current year.

However, the two companies trade on low valuations, which means that they both have upward rerating potential. For example, Bovis has a price-to-earnings (P/E) ratio of 7.6, while Bellway’s P/E ratio is only slightly higher at 7.8. This shows that the market is pricing in a tough period for both companies. But with them having wide margins of safety they could prove to be excellent investments – even if the UK housing market endures a challenging few years.

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 assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Bovis Homes Group. 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.

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