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Lloyds Banking Group plc, Barratt Developments plc And The Housing Boom That Won’t Stop

The biggest purchase you will make in your life is almost certainly your house. It is something we pour our savings into. We lavish thousands on buying furniture, flooring and fittings. For me, and millions others in the UK, our home really is our castle.

What’s more, since Margaret Thatcher’s visionary move to encourage everyone to buy their own houses, it is now, for most people, the biggest and most important investment they will ever make.

A slow-burn recovery

In the past decade, as people in Britain faced the shock of the “credit crunch” and unemployment rose, under pressure from a burgeoning China, the housing market has understandably suffered. But now we can safely say that the Great Recession is over, and both house prices and the number of housing transactions are bouncing back.

A growing population, coupled with the highest ever employment rate, mean that housing demand is increasing, and the supply of homes is not keeping pace. So house prices are rising, and at £196,000 the average UK house price is now the highest it has ever been.

The number of home purchases is also recovering steadily year by year, although it has yet to reach the heights of the 2007 boom. At the peak there were 160,000 transactions per month. In the dark depths of the crash in 2008 it fell as low as 40,000. At the time, the market had gone into deep freeze, with the debt markets in turmoil, and no-one daring to take out a mortgage.

Today the number of transactions per month has recovered to a healthy 120,000. This is a market which is warming nicely and occasionally bubbling, but is far from boiling point.

The shares of Lloyds Banking Group (LSE: LLOY) and Barratt Developments (LSE: BDEV), both closely linked to the housing market, have also been recovering nicely. But I think there is more to come from these companies. I see this as a slow-burn housing boom, with both house prices and the number of transactions ticking upwards year by year.

Back the trend

In the same way, I expect the share prices of both Lloyds and Barratts to edge steadily higher. Both firms still look good value.

Lloyds’ 2015 P/E ratio is predicted to be 9.15, while Barratt’s is estimated to be 11.43. So both shares are moderately priced, with the promise of an increasing dividend yield (3.05% for Lloyds and 5.00% for Barratt Developments).

If you want to get rich quick, look elsewhere. These are long-term buys which you should tuck away, while you steadily collect and reinvest the dividend cheques.

The UK population is set to reach 74.3m by 2039. This means that housing demand will continue to rise, and this housing boom won’t end soon. I believe you should back the trend by buying these shares.

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Prabhat Sakya 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.