Bovis Homes Group (LSE: BVS) rounded off a bad year for housebuilding stocks by issuinga shock profit warning yesterday. This took markets by surprise because onlylast month Bovissaidit was on course for record annual revenues. So are we finally witnessingthe long-awaited property crash?
Down they go
Markets briefly thoughtso, with Bovis falling5.26% yesterday and fellow housebuilders Barratt Developments, Berkeley Group Holdings,Crest Nicholson Holdings and Persimmon also tumbling. However,they soon settled, with Bovis sayingthis was a logistical issue rather than a fundamental problem,caused bydelays in getting the final sign-off for 180 houses before the end of the year. It wasnt due to a collapse in demand andthe housing market goinginto a brutal death spiral, for example.
It may hurtBovis as it cuts its forecast2016 pre-tax profits from 183m to between 160m and 170m, but it says little about the sector. Clearly, investors are rattledafter a tough year, which has seen Barratt and Berkeley Group fall almost 25%, Bovis and Crest Nicholson slide18%, and Persimmon drop12%. However, allare trading atfarhigher levels than five years ago (Barratt, for example, is up 418% in that time), so retrenchmentwas inevitable at some point.
Shaky foundations
Although Brexit has added to investor nervousness, house builders claimit has hadlittledirect impact on sales, at least so far. Demand for property is firmly underpinned by supply shortages andrecord low interest rates. Thatcould changeif UK interest rates start rising in 2017, but aggressivetightening seems unlikely to me. The Bank of England will be in no rush to hike rates as Brexit uncertainty creepsthrough the UK economy.
There are clearsigns that the housing market is beginning to slow. More vendors are now willing to drop prices to secure a sale, with one in three going for an average 23,860 below the asking price, a cut of 7.76%, according to new figures from Zoopla.In London, the averageprice cutis58,498.
Foreign affairs
Most experts predict a slowdown in 2017, with Halifax claiming growth will fall to between 1% and 4% by the end of the year. Prime London is most at risk, with prices in Kensington and Chelsea down4.9% over the past year already, as higher stamp duty and tougher tax rules scare awayforeign investors.
However, much of this years slippage has been driven by sentiment rather than fundamentals. The property shortage, low levels of housebuilding and rock bottom interest rates should maintain demand unless Brexit or a black swan deliver a real shock next year.
Full house
2017 wont be an easy year for the housebuilders but much of the uncertainty is reflected in the price. Barratt, for example, trades at 8.44 times earnings and yields 3.95%. Bovis trades at 8.5 times earnings and yields 4.92%. Persimmon trades at 10.08 times earnings and yields 6.3%. Berkeley trades at 10.54 times earnings and yields 7.08%. These are tempting valuations and yields, and now could be a good time to defy the doom-mongers and start building up your property portfolio.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.