UK housebuilder shares have fallen off a cliff. High interest rates have pushed up mortgage costs, hit demand, and sent house prices tumbling.
Look what’s happened to these FTSE 100 and FTSE 250 housebuilders:
| Company | Market cap | Recent price | 1-year change | 5-year change | Forward P/E | Forward Dividend |
| Barratt Developments | £4.4bn | 443p | -6% | -16% | 6.8 | 8.0% |
| Taylor Wimpey | £3.9bn | 108p | -10% | -40% | 12 | 8.6% |
| Persimmon | £3.8bn | 1,183p | -39% | -54% | 14 | 5.1% |
| Bellway | £2.6bn | 2,104p | -1.2% | -32% | 6.5 | 6.7% |
| Vistry Group | £2.5bn | 703p | -18% | -38% | 8.0 | 7.6% |
| Redrow | £1.6bn | 470p | -6% | -19% | 5.6 | 6.8% |
| Crest Nicholson Holdings | £598m | 212p | -17% | -48% | 10 | 8.1% |
Seen it before
Does anyone remember what happened the last time house prices went into a bit of a slump? I do. Housebuilder share prices plunged back then too.
But as soon as the crisis started to fade, the shares soared. And we had a bull market that lasted for years, with a long period of rising dividends.
At the bottom last time, land prices had weakend, and the builders saw the chance to top up their land banks at bargain prices. Investors who saw what was happening and bought in pocketed sacks of cash in the years that followed.
This time, the builders are topping up their land banks now they can buy cheaply. So could investors who buy the shares today look forward to a new bull run and fat dividends to come?
Big dividends
Today’s dividends look pretty good as they are. But there is a caution here. The forecasts are a bit out of date, and most people will be expecting them to be cut back a little.
In fact, Persimmon forecasts have already been reduced, with the special extra dividends from past years no longer expected. That’s probably why Persimmon might look fully valued now, while others appear cheaper.
Saying that, Persimmon shares on a price-to-earnings (P/E) ratio of 14 with a 5.1% dividend yield, when the sector is at a cyclical down point, look like a steal to me.
I’ve been talking about our last spell of property price weakness in the UK. And how housebuilder share prices climbed up and up after we pulled out of it. But what might cause the same thing to happen this time?
Interest rate falls?
I think the obvious is interest rates starting to fall again. Right now, new fixed-term mortgage deals have hit 6%. And we could see them rise still higher if the Bank of England tightens the screws further.
The main risk I see is that mortgages could remain expensive for some time yet. And then, some folk have been saying house prices have been too high for years. If this isn’t just a short-term squeeze, then the sector could stay weak for good.
But looking at the long term, the UK still faces a big housing shortage. And for me, that makes the sector a buy. I think housebuilder shares could end 2023 ahead of where they are now.
