How you can profit from a property price crash

Housing market bubble BURSTING: Top prices tumble AGAIN sparking fears of CRASH“, screamed a recent Express headline, with the story going on to tell us that prices of top-end properties fell at an accelerating pace in April.

Now, that’s the kind of approach that sells newspapers. Against that we still have the Evening Standard writing that “London homes have earned owners almost £200 a day on average already this year,” so there might not be any need to panic just yet.

But there do seem to be jitters around the housing market, and an increasing number of observers are expecting prices to start tumbling again soon. So what should you do as an investor if the worst fears come to pass?

I think the answer is obvious, and it’s to do exactly what you should have done in the last housing slump — buy housebuilder shares!

Last time round, their share prices fell along with house prices, but they had plenty of cash to invest and spent the time snapping up cheap building land and replenshing their land banks for the future.

Don’t follow theherd

The investing herds were doing the exact opposite of what they should have been doing, as herds so often tend to — they should have been buying the shares, not selling them.

And the profits made by those canny enough to see what was being handed to them on a plate have been phenomenal.  Looking at Barratt Developments, Barratt shares have turned every £1,000 invested in them at the end of 2008 into more than £7,200 today, with the price up to 525p.

Persimmon shares have done even better, turning each £1,000 into nearly £7,800, as the price has soared to 1,951p over the same period. And Taylor Wimpey shares have beaten the pants off both of those, with their rise to 181p inflating our mooted £1,000 into £12,000!

At Bovis Homes the gain hasn’t been quite so astronomical, but Bovis shares have still more than doubled, to 863p. And that’s about the poorest performer, with Bellway shares having four-bagged to 2,459p, and Redrow shares tripling in value to 379p.

What we’re looking at here is a story that has been repeated through the mists of time, and will continue to be retold for as long as stock markets last. When oil prices are at their lowest, that’s when the herds are all selling out of oil stocks — at exactly the time they should be buying. Metals and minerals? The same — the sheep all sell mining shares when the smart investors buy.

What we should be doing is buying when things are cheap and selling when they’re expensive. That’s obvious common sense, isn’t it? I’ll be forever perplexed why so many investors consistently do exactly the opposite… but at least it sets up opportunities for those of us who are of sounder mind.

Buy them anyway?

And you know, even if we don’t get a housing crash, housebuilding shares still look good value to me after they’ve fallen a bit over the past few months — Taylor Wimpey shares are on a 2017 forward P/E of under 10 with a 6% dividend yield expected, Persimmon is on a similar rating and a 5.6% yield, and sector under-performer Bovis is rated on a 2017 multiple of less than seven, again with a 6% dividend yield!

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Alan Oscroft 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.