UK housebuilder shares such as Persimmon, Taylor Wimpey, and Barratt Developments have taken a massive hit in recent years. Since the start of the coronavirus pandemic, these shares have all fallen 50%, or more.
The thing is though, the UK still has a major under-supply of housing. With that in mind, should I be buying housebuilder shares for my portfolio right now?
Long-term growth story
It’s hard to know exactly how many houses need to be built to sort out the UK’s housing shortage.
But what we do know is that back in 2019, the UK government set out a housing target of 300,000 new homes (in England) a year by the mid-2020s in an effort to solve the problem.
“Experts agree that 300,000 new homes a year would start to make inroads on the affordability of housing,” said then-chancellor Philip Hammond when the target was first proposed.
So in theory, there is a long-term growth story associated with this industry.
High interest rates are a problem
Of course, the problem in both short and medium terms is interest rates. Over the last 18 months, mortgage rates have soared, making housing a lot less affordable than it was (and it was already mostly unaffordable relative to average wages).
This spike in interest rates has had a major impact on demand. For example, property website Zoopla revealed in August that the number of house purchases in Britain this year was on course to drop by more than 20% – to its lowest level since 2012 – as a result of higher borrowing costs.
“The trading environment remains difficult, with potential homebuyers still facing mortgage challenges,” said David Thomas, CEO of Barratt Developments, in October.
It’s worth noting that City analysts expect Barratt’s revenue and net profit to fall by 21% and 52% respectively this financial year (ending 30 June 2024).
It’s a similar story with Persimmon and Taylor Wimpey (whose financial years end 31 December). The former is expected to see its revenue and net profit dive 37% and 55%, while the latter’s revenue and net profit are forecast to decline 24% and 50%.
Higher building costs are not helping when it comes to profitability.
Lower rates could be a game-changer
Now if we were to see UK interest rates lowered, demand for housing could be stimulated in a boost to housebuilders.
However, given that inflation remains at high levels, I’m not expecting a substantial drop in rates any time soon.
At its meeting on 2 November, the Bank of England signalled that UK interest rates are likely to stay at current levels for an “extended period”. It also warned that rates could keep rising.
In light of this outlook for interest rates, I won’t be rushing to buy housebuilders shares for my portfolio. To my mind, the backdrop is likely to remain challenging for a while.
Right now, I’m seeing better opportunities in the stock market.