A housing recovery will likely drive long-term growth for Lloyds shares

Lloyds is the biggest UK mortgage lender, so its shares must surely benefit from any upturn in the housebuilding business, mustn’t they?

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It wasn’t just the housing market slump that put the skids under Lloyds Banking Group (LSE: LLOY) shares. But it sure didn’t help.

In fact, I’m seeing weak bank valuations all round. Oh, and big dividend yields as a result. But the businesses can be different in a few ways.

Barclays, for example, is still big in international investment banking. Others turned inwards to UK retail banking after the financial crash, for more safety.

Weakness, or strength?

It’s perhaps ironic, then, that the next crunch came from right here, when the UK’s property market slumped. And as Britain’s biggest home lender, Lloyds has been hit more than most from high mortgage rates leading to bad debts.

Still, it looks like the pain hasn’t been as bad as we might have feared.

In the 2023 full year, Lloyds recorded underlying impairment charges of a fairly modest £308m. And that’s after a write-back in the fourth quarter, which reversed some earlier losses.

Interest income

The bank also posted net interest income of £13.8bn for the year, up 5%. That’s with a net interest margin of 3.11%, which I see as pretty good. A disastrous year for mortgage lenders? It doesn’t look like it from where I’m standing.

Some have already cut their rates, without waiting for the Bank of England (BoE) to act. And mortgage demand, while maybe a bit weaker, still looks strong.

I’m not surprised, when we face such a big long-term housing shortage. I’d say that can only be good news for companies servicing any part of the demand. That’s mainly the housebuilders, and mortgage lenders like Lloyds.

Housing demand

So how is demand for new-builds actually going?

With its 2023 results, Barratt Developments posted only a fairly small fall in forward reservations. The firm spoke of an “encouraging uplift in reservation activity since the start of January,” and expects to complete 13,500 to 14,000 homes this year.

Taylor Wimpey, meanwhile, told us of “encouraging signs of improvement with reduced mortgage rates positively impacting affordability and confidence in our customer base.” We should see 9,500 to 10,000 new homes in 2024.

To my mind, that’s all good news for mortgage lenders.

Risky business

What are the risks? The biggest might just be taking any notice of me. I’ve been bullish about Lloyds for years, expecting the share price to climb. And I haven’t exactly been right so far.

So, dear Foolish investors, never buy a stock just because I think it’s good value — in fact, my wife has suggested that maybe even I shouldn’t do it. Still, with dividends, my total returns haven’t been a disaster so far.

Short-term pain, long-term gain

Seriously, I do think higher-for-longer interest rates and prolonged economic weakness could keep Lloyds shares down for a while longer.

But for those who do their own research and understand the risks, I still reckon Lloyds shares could be a great long-term pick. And a BoE rate cut might even kickstart things.

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.

Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. 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.

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