I never understood why the housebuilding sector was hit harder than any other after last summer’s EU referendum shock. Did investors really expect Britons to stop buying houses overnight? Actually, it appears many did, with the Remain campaign’s Project Fear warnings still ringing in their ears.
House of fear
I have just sifted through press clippings from last June and they were full of dire reports of panicky buyers pulling out of deals or slashing their offers. Experts warned of a ‘Brexit bubble’, rapid falls in housing turnover and tumbling house price growth. Remember this gem? The Treasury forecast that Brexit would prompt a fall in house prices of up to 18%.
Well, it didn’t happen. Britons felt the fear and bought anyway. Latest numbers from the Land Registry show the average UK house price rose 6.2% to £218,255 in the year to January, adding an extra £13,000 to the cost. House prices are propped up by the disastrous shortage of stock for sale, and Brexit will not change that. That is bad news for young homebuyers but good news for housebuilders, because there is a ready, willing and – thanks to low interest rates – able roster of buyers looking to snap up their shiny new units.
Investors are belatedly waking up to the fact, and big builders such as Barratt Developments (LSE: BDEV) and Taylor Wimpey (LSE: TW) been climbing steadily ever since that initial Brexit sell-off. At today’s price of 560p, Barratt is now 71% above its 52-week low of 326p, while Taylor Wimpey, which currently trades at 194p, is 76% above its year-low price of 110p. The growth continues, with both stocks up nearly 15% in the last three months alone.
This is particularly impressive given that they have both delivered barnstorming long-term share price growth, up 321% and 298% respectively over five years. This really has been a sector to put your money into. Yet despite these strong growth rates, Barratt trades at just 10.15 times earnings, and Taylor Wimpey at 10.75 times. These are still bargain valuations.
I don’t doubt that the housing market is now slowing. After eight years of rampant growth, that’s a good thing too. Rising inflation is likely to push up mortgage rates and dampen people’s buying power. The buy-to-let tax crackdown could also stifle a key source of demand. Brexit could go badly wrong. However, with the supply/demand imbalance so badly out of tilt, I believe that properties will continue to sell, and prices will stabilise. With figures out today showing construction activity declining sharply in February, there is no rush of new builds set to sweep the market.
City forecasts suggests annual earnings per share growth for both companies will slow to the low single digits, a marked comedown from the high double- (and in some cases triple-) digit EPS growth seen between 2012 and 2016. But with fat operating margins of 15.8% and 20.7% respectively, Barratt Developments and Taylor Wimpey both look like buys to me.
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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. 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.