Shortage Of Property Supply Will Continue To Boost Barratt Developments Plc, Persimmon plc And Bovis Homes Group plc

It is customary for the UK house prices to see a seasonal summer slowdown, but there was little sign of that in the current overheated property market.

Prices leapt 3% between June and August, Halifax reports, and says the lack of a seasonal slowdown points towards strong autumn sales as well. An excess of demand oversupply is the main reason, and while that is bad news for first-time buyers, it is yet more good news for housebuilders.

Shortage of property supply spell busy times ahead for Barratt Developments (LSE: BDEV), Persimmon (LSE: PSN) and Bovis Homes Group (LSE: BVS). All three companies have thrashed the FTSE 100 this year. While the index fell 8%, Barratt leapt 72%, Persimmon grew 56% and Bovis grew 30%. Over five years the FTSE 100 returned 13% but these three builders soared 278%, 423% and 177% respectively.

The supply/demand equation is balanced firmly in favour of housebuilders. The truth is they can’t build homes fast enough. But is this favourable mathematics sustainable? Three factors could hit demand over the next few years.

1. Rates Will Rise

Record low mortgage rates have also helped to turbo-charge demand but they won’t stay low forever. At some point the Bank of England may finally act, and that will hit buyer sentiment. Yet the fateful day is regularly postponed, and even if rates do gradually rise, they will remain extremely low by historical measures.

2. Affordability Is Stretched

In 1995, the average earner spent between 3.2 times and 4.4 times their salary on a house, depending on where they lived, according to figures from The Guardian. By 2012-13, the last year for which complete data is available, that had soared to between 6.1 times and 12.2 times regional incomes. And prices have only shot up since then. Yet other figures suggest that once you take into account cheap finance, property remains historically affordable.

3. Buy-to-let Tax Crackdown

The buy-to-let market continues to boom as amateur landlords drive prices higher. Buy-to-let mortgage numbers soared 39% to 25,200 in the year to July, and 14% on June. The only cloud is Chancellor George Osborne’s forthcoming tax crackdown, which will gradually phase out higher rate tax relief from 2017. This could cost small-scale amateur landlords up to £2,000 per property a year, although larger investors can get round it by setting up a limited company. Buy-to-let should still battle on.

The Supply Side

These three factors will take some of the heat out of the housing market, and there are early signs of cooling in red hot prime central London, due to sky-high prices and costlier stamp duty at the top end. But even if UK demand does dip, supply shortages will continue to rage.

Just 125,110 homes were built in England in the year to March, but we need at least double that number. The National Housing Federation says there is now a shortfall of 500,000 homes. Cuts to housing associations budgets will only worsen the new-build shortfall. There aren’t enough trained bricklayers, carpenters and joiners to build them, as a quarter of a million quit the industry after the financial crisis. Barratt, which builds more than 14,000 houses a year, says the sluggish planning system is an even bigger obstacle. 

The supply/demand equation will continue to deliver the same answer: Britain needs to keep building. This suggests the sums will continue to add up for Barrett, Persimmon and Bovis Homes Group.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.