Could slowing house prices hit these booming 2 FTSE 250 housebuilders?
Ive just been reading a gloomy article about the state of the housing market. So whats new? Ive been reading articles like this for the last 10 years. At some point, the doom-mongers will be rightand prices will crash like a ton of bricks. Are we now close to that point?
Crashing bores
The latest bout of angsthas been triggered by todays Nationwide figures showing house prices havenow fallen for the second month in a row. They dipped 0.4% in April, on top of Marchs 0.3% drop, which wasthe 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Worryingly, house price growth is falling even as mortgage rates hitnew lows, as seen by Atom Banks (swiftly withdrawn) five-year fixed rate at1.29%. Forgetthe housing shortage,dirtcheap 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%, buttrades 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 at1446p. 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 todays stretched affordability and shrinking consumer sentiment.
I have justtaken a look at these two companys earnings per share (EPS) numbers and they reflect thisview perfectly. Bellway has posted five consecutive years of EPS growth in the high double-digits, with numbers ranging from 36% to 72%. That is forecastto slowto 10% and then 6% over the next twoyears.It is a similar picture at Galliford Try, also withfive years ofjuicy double digit EPS growth. Although it can still look forward to 13% growth both this year and next.
Bellway to heaven
House builder stocks arent going to triple or quadruple over the next five yearsbutI believe they still have a role to playin 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.
If you think the house builders are played out we may have a more exciting growth prospect for you right here.
This mid-cap company has been turning on the style lately and one of the Motley Fool’s top analysts reckons it is the latest British brand with the potential to go global.
To find out its name you simply need to download our BRAND NEW report A Top Growth Share From The Motley Fool.
Click here to read this no obligation report. It will be yours in moments and won’t cost you a single penny.