The Taylor Wimpey (LSE: TW.) share price has been rising over the past few months. Year-to-date it’s up 19%. With signs that consumer confidence toward the housing market is improving, is now the time for me to invest?
Year of two halves
In the first six months of 2022, the housing market was performing strongly. Buoyant house price inflation had been fuelled by the after-effects of pandemic-driven stimulus, and a low interest rate environment meaning cheap mortgages.
But the second half saw changes. In September, on the back of the disastrous mini-Budget, mortgage rates that had began to rise more quickly. This led Lloyds, the UK’s largest lender, to predict house price falls of up to 8%. Unsurprisingly, Taylor Wimpey’s share price plummeted.
Slow road to recovery
The latest housing survey by the Royal Institute of Chartered Surveyors, continues to provide a downbeat assessment. That said, it has begun to see signs of improvment in many key metrics.
New buyer enquiries rebounded significantly in February to a net balance of -29%, which compares to -45% in January. This figure was the least negative result since July last year.
The time taken to complete a sale continues to edge upwards, reaching 19 weeks. Looking ahead, sales are anticipated to slip over the next few months. But more tellingly, over 12 months, the sales outlook looks to be more stable.
As the macro-economic outlook has improved, last month Lloyds reined in its expectations for house-price inflation. In 2023, Its base case is for prices to fall 6.9%, with a further decline of 1.2% in 2024. Thereafter, it expects a slow recovery.
Would I buy Taylor Wimpey shares?
There are many good reasons for me to buy Taylor Wimpey shares. Firstly, although interest rates continue to rise, the pace of hikes is slowing considerably. That suggest to me that we’re likely at or near the peak of this rate hike cycle.
The company also supports a market-beating forward dividend yield of 8%. It has stress-tested this policy and continues to believe it could be maintained throughout the business cycle. This includes a scenario where average prices fall by 20% and volumes reduce by 30%.
The industry is underpinned by long-term structural growth drivers. Housebuilding in the UK continues to lag demand. Factors including planning laws acting as a brake on development ensure that demand will outstrip supply well in to the future.
However, despite all this, I remain deeply concerned about its share price in the short term. The true effects on the economy of unprecedented rate hikes are only now starting to become apparent.
The sales rate year-to-date is significantly below average. Potential buyers are grappling with issues related to affordability as well as the general cost of living. Only last week the Bank of England reported that mortgage approvals are at their lowest level since 2016, excluding the pandemic.
As the last few weeks has demonstrated, market sentiment can change very quickly. If prices were to fall by only single-digits, many of the price gains seen during the pandemic would remain intact. But set this against a reality of higher cost of capital, and the risks for me are just too great. For now, I won’t be investing.
