Property stocks suffered after a housing market dip last year, but is it worth investing now?

Is it worth investing in property stocks after a house price crash failed to materialise?

aerial view of houses
(Image credit: Getty Images)

The housing market may be showing signs of recovery but it is unclear if this will be  reflected in property stocks.

A property market crash predicted by some analysts didn’t materialise in 2023, while falling mortgage rates have boosted buyer demand and given sellers more confidence with asking prices.

The latest residential market survey from the Royal Institution of Chartered Surveyors suggests property professionals are becoming less negative about house prices and buyer demand, while estate agent brand Knight Frank recently revised its forecasts for the market upwards and Halifax even suggested that prices rose last year.

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Lower inflation and cheaper mortgages may make buyers more confident about now being the right time to buy a house, but what about if you want to invest in the property market and help solve the housing shortage.

The state of the property market

It can be hard to make sense of property market data.

House price reports are often out of date by the time they are published.

For example, there is a lag of at least two months in the Office for National Statistics house price index due to Land Registry delays, while Halifax and Nationwide figures only reflects their levels of lending and the types of property being purchased that month rather than the whole market.

Mortgage rates are a big factor on the health of the property market.

Affordability can be a big barrier to property transactions and mortgage approvals slowed in the middle of 2023 as pricing remained above 6% and interest rates were rising.

The end of the Help to Buy scheme also hit housebuilder profits, with no further government housing schemes to support new-build purchases.

Listed companies such as Persimmon, Bellway, Berkeley, Taylor Wimpey and Barrett Developments, all warned last summer of reduced profits and that they were planning to cut construction.

But since then, inflation has slowed despite a shock rise from 3.9% to 4% in December where it remained in January, while interest rate rises appear to have peaked at 5.25% and there are hopes of cuts in the coming months.

Housebuilders have used their recent annual reports to warn of uncertainty in the year ahead as the market continues to adjust to higher rates.

For example, Persimmon said in its annual results for 2023 that high interest rates and the General Election will weigh on demand this year.

“There is a lot of data out there with regards to the housing market, and much of it is conflicting,” says Oli Creasey, property analyst at Quilter Cheviot.

“Different house price indices draw from different pools of data and report on different time frames, which is why you can have Halifax reporting rising prices, while two weeks later, the ONS reports prices falling.

“Other data points are difficult to interpret – the RICS survey for example, reported an improvement in sales figures late last year. But the actual data improved to be a very soft positive figure, with the outlook for prices also improving, but still negative - so perhaps we could say ‘getting worse more slowly’.”

Is it worth investing in property stocks?

Housebuilders such as Barratt Developments, Persimmon and Taylor Wimpey are among the stalwarts of the FTSE 100.

They pay decent dividends of above 5%, although Persimmon and Barratt Developments have cut theirs recently.

The stocks may pay a decent income, but falling profits and a slower market could hit these payments as well as share price growth.

For example, the Persimmon share price is up 23% over the past six months but down down almost 5% so far this year.

Similarly, Taylor Wimpey is down 3% this year but up 18% since September, while Barratt has had a tougher time and is up 6% on a six month basis but down 14.5% so far this year.

 “The housebuilding companies find themselves in a tough spot,” says Creasey.

“Prices haven’t actually moved that much, but instead sales volumes have dropped sharply. In boom years, builders could sell high volumes at high prices, but in the current environment they have to prioritise one or the other.

“Holding prices as firm as possible, and as a result making fewer sales as fewer buyers are willing or able to afford those prices, is probably the better option for the businesses, which can slowly build rates (up to a point) and then accelerate again once the market shows signs of strengthening.”

Another factor is competition.

Rightmove has long been a dominant player in the residential market for property listings but its rival OnTheMarket was recently acquired by US real estate giant CoStar and is planning a major marketing push.

JP Morgan has recently expressed concern about Rightmove’s market position due to the CoStar takeover and downgraded Rightmove to a “sell,” pushing its shares down.

Ben Yearsley, director of Fairview Investing, says property valuations are undemanding and even if you think profits are due to fall, asset values of many of the builders supports prices.

“With rates having peaked the housing market will pick up and both main political parties want more houses built which should be good news,” he says.

“As for Rightmove, it’s still the market leader and he go to portal. It’s a great long term business 

The sector is also particularly sensitive to interest rate rises, with many housebuilding stocks falling after the unexpected inflation rise in December and predicting a subdued market this year.

Russ Mould, investment director at AJ Bell says house building stocks have all rallied substantially from a low in October – when inflation first started to significantly drop - albeit to varying degrees. 

“The hefty gains partly reflect markets’ hopes that the Bank of England will pivot toward cutting interest rates sooner rather than later, despite protestations from Governor Andrew Bailey to the contrary, and competition among the banks and building societies, which is already helping to drive mortgage rates lower,” says Mould.

 “They also reflect how gloomy sentiment toward the builders had become, thanks to the chaos caused by Trussonomics in late 2022, rising interest rates, higher energy prices and sagging consumer confidence. Earnings and dividends forecasts have already been cut back deeply. Perversely, it may turn out that this meant it was a good time to look more closely at the builders – the darkest hour is before the dawn, after all.”

A potential stumbling block, Mould warns, is if there is a delay in those Bank of England rate cuts. 

“The latest UK inflation figure was higher than forecast and markets responded quickly, as they pushed out expectations for the first rate cut from the Monetary Policy Committee meeting to May from March and the number of quarter-point reductions seen coming in 2024 to five from six,” adds Mould.

Marc Shoffman
Contributing editor

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.