House prices in the UK have seen a dizzying rise over the past year. This has been great for property stocks, which would otherwise have been impacted significantly by the pandemic. In challenging times the market typically slumps as people hold off from making big financial commitments. However, a helpful policy environment turned this argument on its head.
Why the housing market can crash
A key policy among these is the stamp duty holiday. In was initially applicable for up to £500,000 worth of property value. But it is in the process of being rolled back. From July onwards, the limit dropped to £200,000. And from October onwards, it will end entirely.
With this as the backdrop, I occasionally find myself looking at headlines speculating a housing market crash. Buyers have rushed in to make property purchases to save a substantial amount of money. But once this advantageous policy ends, there is no real incentive to ensure purchases within a time window.
Can the crash really happen though? I think as investors we should be prepared for all kinds of eventualities. A case in point being the pandemic. No one expected anything like it. And we are still grappling with it.
What would I buy in a crash?
So what would I buy in a housing market crash?
It is a no-brainer that property stocks will be most affected by such news. But, FTSE 100 stocks like Persimmon and Barratt Developments also have strong order books. This means, that they can potentially recover fast from a crash, even if there is some dent to their revenues. Also, given their healthy past financials, the likelihood of bouncing back is faster. In the same vein, I would stay away from property-related stocks that are struggling. If their financials are already on shaky ground, they may not have the strength to withstand the effect of a house price crash.
How likely is a crash, though?
That said, I would be very surprised if a big housing price crash actually happens. Some softening in house prices could happen, going by the sharp run-up in the past months. But the ongoing economic recovery could continue to drive housing demand. Also, interest rates are still quite low, which makes the terms of property purchases much easier.
Further, since savings have been built up in the past year to record highs, people have been in a much better position to make down payments on loans than before. These factors can provide a floor to how much house prices can fall.
However, I do think that house prices will correct, and even that will pull back property stocks. This should be a good opportunity to buy some of them, which have run up a lot since the stock market crash of early last year. The Persimmon stock, for instance, was almost back to its pre-pandemic highs a few months ago before slipping a bit in the last quarter. So I am gearing to buy these stocks on a dip.
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Manika Premsingh owns shares of Persimmon. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.