House prices reached a record high in December, but this may be fleeting as many analysts have forecast a sector downturn in 2021. The lasting effects of pandemic restrictions and a job losses mean an ongoing rise is perhaps unsustainable. Some analysts are even predicting a housing market crash in 2021. This could be problematic for FTSE 100 property stocks such as housebuilder Persimmon (LSE:PSN).
A positive trading statement
The Persimmon share price rose nearly 64% from 2020’s March market crash up to the year end. It fared much better than expected during the pandemic and ended the year on a high. Year-to-date the share price has fallen slightly, but its latest trading statement is encouraging.
Completion delays were an inevitable result of the Covid-19 restrictions, but the company coped well and adapted its procedures. It ended the year with group revenues of £3.33bn, down £0.32bn on 2019.
The average selling price of a Persimmon house increased by 7%, which amounted to £15k year-on-year. This was a boost to the group, and a highlight in a difficult year. The ONS says the national average selling price for newly-built homes was around £300k (as of August 2020). This makes Persimmon’s average private selling price of £250.9k about 16% lower than the UK national average.
Tough times ahead… or not?
First-time buyers drive Persimmon’s sales and in 2020, around half its private home completions were to this target market. This may be a problem in the future if mortgage lending becomes stricter and young people struggle to get on the property ladder. While the furlough scheme kept many consumers’ finances ticking over in 2020, there’s concern job losses will mount in the coming months.
In response to the pandemic, the government brought in a temporary halt to stamp duty on residential properties in the price bracket below £500k. This stamp duty holiday will end on March 31, so buyer demand is expected to drop back after that.
Yet the government has encouraged construction to continue throughout the ongoing restrictions. And it’s likely to continue to support housebuilding as a national shortage of homes remains an underlying problem. Therefore, a counter-argument to a potential housing crash is that the government will encourage construction and housebuilding to get the economy moving again. Another theory is that with Brexit out of the way, international interest in property purchases will increase.
Persimmon’s share price outlook
Persimmon’s price-to-earnings ratio is below 10, which means it’s potentially still in bargain territory. Earnings per share are £2.66. At around 9%, its dividend yield is also impressive, but this is only covered once by earnings. While I find these financials tempting, I do have concerns that the share price may fall further in the coming months. Then again, its enticing dividend could make it a nice addition to my long-term portfolio. I’ll add it to my watch list and possibly consider it once the outlook is clearer.
I could also consider a property fund as an alternative way to invest in this sector. But property funds often respond in a similar vein to the economy. Therefore, if the economy is thriving, the property funds enjoy a good performance too. Sadly, the UK economy is far from thriving and I’d be wary of investing in property funds at this time.
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Kirsteen has no position in any of the 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.