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Why Barratt Developments Plc Is A Buy For Me

What is the best investment a person can make over the course of his lifetime? As I’m a writer on an investment website, you might expect me to say shares in reliable blue chip companies.

But actually I think the best investment you can make is to buy a house. Over the long term, house prices will increase. There is no chance of panic selling houses like you might shares. And when you make the purchase you might only pay, say, 20% of the value of a house, whilst still benefitting from price increases from year to year.

Once you have bought your house, then I would say invest most of your remaining wealth in shares.

The contrarian buy of the decade

Yet if house prices seem like a one-way bet, shares in housebuilders definitely have not been. Housebuilders such as Barratt Developments (LSE: BDEV) and Persimmon, which reached all-time highs in 2007, fell crashing to earth after the Credit Crunch.

At the trough of the share price falls, Barratt Developments fell to a mere 1/20th of its all time high. At that stage no-one suggesting investing in this company would have been taken seriously — but it was actually the contrarian play of the decade.

Since then the share price has 7-bagged, and the trend is still, very much, upwards.

I think there will be an extended house price boom

Why? Because, after a prolonged slump, house prices are rising once again, with the initial boom in London spreading out to the rest of the country. With low interest and mortgage rates, low inflation, decreasing unemployment and increasing employment, I suspect we will have an extended house price boom.

Sometime next year interest and mortgage rates are expected to rise, but only gradually. This is unlikely to cause a crash, but I suspect it will temper and moderate the house price boom. In fact, by slowing the rate of house price increases, I think this will actually prolong the life of the house price boom, and make it more sustainable.

All this means that the profits of the housebuilders are set to surge ahead. And the rise in their share prices will gather momentum. I reckon that the recent share price fall has created a buying opportunity for anyone who has not yet bought into the housebuilders.

Acoording to consensus estimates, Barratt Developments is on a 2014 P/E ratio of 12.5, falling to just 9.1 in 2015. The dividend is also expected to be restored this year. You might think you should have bought earlier, but I think the housebuilders still have a long way to rise. I rate Barratt Developments a buy.

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Prabhat owns shares in Barratt Developments.