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Could slowing house prices hit these booming 2 FTSE 250 housebuilders?

I’ve just been reading a gloomy article about the state of the housing market. So what’s new? I’ve been reading articles like this for the last 10 years. At some point, the doom-mongers will be right and prices will crash like a ton of bricks. Are we now close to that point?

Crashing bores

The latest bout of angst has been triggered by today’s Nationwide figures showing house prices have now fallen for the second month in a row. They dipped 0.4% in April, on top of March’s 0.3% drop, which was the first since mid-2015. Prices are just 2.6% higher than one year ago, the weakest annual increase in almost four years.

Worryingly, house price growth is falling even as mortgage rates hit new lows, as seen by Atom Bank’s (swiftly withdrawn) five-year fixed rate at 1.29%. Forget the housing shortage, dirt cheap money has done most to drive up prices. However, as wages stagnate, and election/Brexit uncertainty grows, cheap money is losing traction. The big worry is what happens when interest rates rise.

Summer shock

House builders were hit hard in the initial aftermath of the Brexit shock, only to recover as the UK economy showed surprising resilience. For example, FTSE 250 listed Bellway (LSE: BWY) tanked from 2734p to 1689p in the fortnight after the referendum, a drop of more than 38%, but trades higher at 2845 today.

Another FTSE 250 house builder, Galliford Try (LSE: GFRD), slumped from 1321p to 785p after Brexit, in a similar-sized drop of just over 40%. Again, its fightback has been impressive, with the stock now higher than it was at 1446p. Long-term investors have little to complain about, with the builders up 267% and 132% respectively over five years.

Housing slowdown

I always felt the sell-off was overdone, as if the small matter of Brexit was going to deter the British from buying houses. In a crammed island where demand exceeds supply, I do not foresee a major house price crash. However, the glory growth years are surely over, given today’s stretched affordability and shrinking consumer sentiment.

I have just taken a look at these two company’s earnings per share (EPS) numbers and they reflect this view perfectly. Bellway has posted five consecutive years of EPS growth in the high double-digits, with numbers ranging from 36% to 72%. That is forecast to slow to 10% and then 6% over the next two years. It is a similar picture at Galliford Try, also with five years of juicy double digit EPS growth. Although it can still look forward to 13% growth both this year and next.

Bellway to heaven

House builder stocks aren’t going to triple or quadruple over the next five years but I believe they still have a role to play in a balanced portfolio, and much of the negative sentiment is priced in. For example, Bellway currently trades at just 9.12 times earnings, and yields 3.79%, covered 2.9 times. Galliford Try is valued at 11.07 times earnings and yields a whopping 5.67%, albeit with thinner cover of 1.6. At these prices, property still looks a buy 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.