Few markets are as emotional, irrational and tragically for the Britisheconomy strategicallyimportant as the UK housing market. Chancellor after Chancellor has either turned a blind eye to housing bubbles, or actively encouraged them, knowing how the marketsfortunes ticklethe national psyche.
Bubble trouble
Arguably, were now in a 20-year house price bubble, driven by thesteady decline in interest rates since the baserate topped out at12% in September 1992. Sincethe Millennium, central bankers have responded to successive crisesby slashing base rates and mortgage rates have followed: last week Yorkshire Building Society launched the markets cheapest two-year fix, charging just 1.17%.Today,property portal Rightmove reports that UK asking prices hita new record of 308,151 in May.
Cheap borrowing has also driven the share prices of major British builders.Barrett Developments (LSE: BDEV) is up amarket-thrashing 347% over the past five years, 116 times the growth of the FTSE 100, which rose just 3%. Persimmon (LSE: PSN) rose 291%, while Taylor Wimpey (LSE: TW) beat them both bysoaring a rip-roaring 357%. Can it last?
Full house
Cheapmoney is only partly to blame. The soaringpopulation hasalso fuelleddemand for housing, as has the buy-to-let bonanza. That source of growth is now imperilled by Chancellor George Osbornes targeted tax crackdown, although first-time buyer schemes such as Help to Buy mayreplacelostdemand.
At some point, the crazinesshas to stop. Interest rates cantgoany lower. The affordability ceiling must be close, given stagnating wages. The property industry is now waiting to see the impact of the 3% surcharge on buy-to-let and second home purchasers. There was a surge insales in the run up to April, and early signs suggest demand has since dipped. It may only be temporary.
Building design
Demand for housebuilder shares has alsodipped, with recentperformance figures indicatinga sector that may just berunning out of juice. Barrett has seen itsshare price fall nearly 6% in the past 12 months, despite announcing an improvedsales rate in the first 19 weeks of the year, as well as reporting strong market conditions with good levels of demand for new homes.
Barrett, which isaiming to return a generous678m to shareholders over the next 18 months, may have been punishedby wider forces, such as fears over the impact of the Brexit referendum, higher building costs and the harsher tone onbuy-to-let.
Partynot quite over
Persimmon has faredbetter, rising a steady 8% over the lastyear. Rising demand,cheap mortgagesand historically low cancellation rates have kept the party going. Its the same story at Taylor Wimpey, which is benefiting from healthy demand for new-build housing and also boasts astrong forward order book and high-quality land bank.
Some analysts have said the sector looks potentially overvalued as measured byprice-to-book and cyclically adjusted price-to-earnings, but todays P/E ratios hardly look demanding, with all three trading between 11-12 times earnings. Only an interest rate hike could inflict serious damage on the sector, but theres little sign of that. I wouldnt sell these stocks, but given the cyclical nature of the sector, I wouldnt buy them today either.
If you’re looking toinvest in the next exciting UK growth prospect (rather than the last one), we may have somethingfor you right here.
This mid-cap company has been putting on the style lately and one of the Motley Fool’s top analysts reckons it’s the latest British brand with the potential to go global.
To find out its name all you need do is 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.
Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
