A Market Crash? Don’t Bet the House on It

As
a
result,
mortgages
themselves
are
harder
to
come
by,
and
lenders
are
being
tougher
as
economic
conditions
tighten.
Houses
are
now
also
much
more
expensive
to
build.
After
a
golden
decade
of
strong
returns,
shares
in
London-listed
housebuilders
reflect
this
malaise
and

short
sellers
have
started
to
circle.
But
are
investors
being
too
pessimistic?

Yes,
according
to
Morningstar’s
latest
report
on
the
sector,
authored
by
analysts
Grant
Slade
and
Ava
Gams
and
titled

UK
Homebuilders:
Built
on
Solid
Foundations,
Not
Shaky
Ground.
They
look
at
the
long-term
drivers
of
UK
property
demand
and
select
the
stocks
most
likely
to
benefit.

A
Crash
Coming?

If
interest
rates
are
yet
to
peak,
some
experts
are
expecting
worse
to
come
in
terms
of
house
price
falls.
Some
are
even
calling
for
a
crash
to
“rebalance”
the
market
after
strong
capital
gains
since
the
global
financial
crisis
of
2008-2009.

Morningstar’s
Slade
and
Gams
say
an
all-out
meltdown
in
prices
is
unlikely,
however,
because
of
ongoing
demand
for
rental
property.
Interest
rates
are
also
forecast
to
peak
this
year
and
then
start
to
fall
–
so
mortgage
costs
will
too.

Nevertheless,
house
price
growth
is
likely
to
moderate
in
the
medium
term
to
around
3%
a
year,
Slade
says,
and
that’s
below
the
long-term
average.
Housing
in
general
is
fairly
valued
rather
than
extremely
overvalued,
which
would
imply
a
correction.

The
current
data
is
confusing
–
building
society

Nationwide
reported
a
monthly
fall
in
house
prices
in
May,
but
that
follows
a
rise
in
April.
Year-on-year
house
prices
are
weaker.
What’s
troubling
investors
at
this
stage
of
2023
is
that
the
trends
are
pointing
downwards.

Slade
says
the
housing
market
is
at
a
cyclical
low
after
a
long
period
of
growth,
but
that
current
valuations
imply
that
the
market
will
never
recover.

Beyond
2023

As
well
as
house
price
falls,
what
troubles
investors
and
weighs
on
housebuilder
valuations
at
this
point
is
the
idea
that
current
home
sales
volumes
will
be
significantly
lower
than
the
average
of
the
last
10
years
–
a
scenario
our
analysts
think
is
“highly
implausible”.
In
contrast,
they
expect
house
sales
to
bounce
back
meaningfully
over
the
coming
decade.

One
key
argument
for
this
recovery
hangs
on
demand.
The
supply
of
homes
has
for
many
years
failed
to
keep
up
with
the
number
of
people
wanting
to
buy
them.
This
is
set
to
continue,
with
successive
governments
unable
to
trigger
the
“right”
housebuilding
levels.

Modelling
Office
for
National
Statistics
(ONS)
data
on
demographics,
our
analysts
forecast
population
growth
will
continue
to
support
housing
demand
in
the
coming
decades.
Net
migration
figures
were
above
600,000
last
year,
significantly
above
forecasts.

“We
think
that
net
migration
will
be
stronger
over
the
coming
decade
than
the
ONS
projections
suggest,
noting
that
its
net
migration
projections
have
perennially
undershot
actual
migration
figures,”
they
say.

Another
swing
factor
is
the
expected
rise
in
single-person
households
in
the
future,
which
will
also
support
requirements
for
more
housing
stock.
So
we’ve
got
a
combination
of
an
ageing
population
(more
people),
higher
migration
to
the
UK
(more
people)
and
smaller
households
(more
property
needed)
all
combining
to
make
a
compelling
bull
case. 

Housebuilding
Stocks

Why
will
listed
housebuilders
be
able
to
capitalise
on
these
demographic
trends,
rather
than,
say,
smaller
bespoke
constuction
companies?
The
answer
is
multi-faceted.

“Existing
market
shares,
extensive
land
development
experience
and
inventories
of
greenfield
land
held
for
future
development,
coupled
with
expertise
in
navigating
the
UK’s
unique
urban
planning
system
make
us
confident
that
they
will
continue
their
significant
contribution
to
new
housing
supply
in
the
coming
housing
cycle,”
Slade
and
Gams
say.

In
terms
of
the
companies
Morningstar
covers,
Persimmon
(PSN)
is
the
pick
because
of
its
focus
on
cheaper
housing
and
proven
track
record
of
shareholder
returns.
With
“affordability
constraints”
likely
to
continue
–
in
plain
English,
people
will
struggle
to
buy
at
current
prices
–
desire
for
better
value
housing
is
expected
to
stay
strong.

“Persimmon
is
unique
amongst
its
major
homebuilder
peers,
focusing
on
first
homebuyers
in
the
lower
value
segment
of
the
housing
market
where
it
delivers
homes
priced
well
below
the
UK
average
house
price.
Its
differentiated
model
has
delivered
for
shareholders
over
the
long-term,”
they
say.

Persimmon’s
peers
Taylor
Wimpey,
Barratt
Developments
and
Bellway
all
screen
as
undervalued
too,
despite
some
recovery
in
share
prices
this
year
after
a
bruising
2022.

A
Bad
2023,
Then
a
Recovery?

Our
analysts
don’t
shy
away
from
the
difficulties
faced
by
listed
housebuilders
this
year.

“With
dramatic
financial
tightening
bringing
the
prior
decade’s
worth
of
rising
house
prices
and
home
completions
to
an
end,
the
2023
outlook
for
UK
homebuilders
is
grim,”
they
say.

“Volumes
are
expected
to
contract
meaningfully
as
homeowners
are
shied
away
from
the
housing
market
by
the
marked
increase
in
mortgage
interest
rates.
Equally,
profit
margins
are
under
significant
pressure
as
higher
interest
rates
create
a
headwind
to
house
prices
at
a
time
when
inflationary
pressures
continue
to
soar.”

Still,
the
biggest
homebuilders
are
in
a
strong
financial
position
to
ride
out
the
current
crisis,
with
low
debt
or
even
positive
cash
positions.
This
compares
favourably
with
how
many
went
into
the
last
financial
crisis,
which
was
another
cyclical
low
in
the
housing
market
that
preceded
a
recovery
in
prices.

“With
UK
homebuilders
under
our
coverage
well-positioned
to
ride
out
the
near-term
turbulence,
investors
stand
to
benefit
from
taking
a
contrarian
position,”
they
say.

James
Gard
is
senior
editor
at
Morningstar

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