Housebuilders have had to endure a challenging economic environment in recent years.
High interest rates have been bad news for the sector, dampening activity among prospective homebuyers and making it more expensive for developers to finance projects. Inflation hasn’t helped either, pushing building costs up and squeezing margins.
This is reflected in share price performance. Persimmon is down -56% over the past five years, Barratt Redrow -25% and Taylor Wimpey -16%. Vistry and Bellway are in the green but only just, both posting share price growth of around 2% over this period.
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The challenges don’t end there either. Builders have been hit by significant remediation costs and new fire safety regulations following the Grenfell tragedy. FTSE 100 and FTSE 250 builders have spent more than £3.5 billion in this area since 2020, according to investment platform AJ Bell.
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Together, these headwinds have caused valuations to cheapen. Data from AJ Bell suggests the sector is trading at an average of 0.9 times its historic book value. “The old rule of thumb is that builders may be cheap below one times book value and expensive when they get toward two times and above,” said AJ Bell’s investment director Russ Mould.
With the economic backdrop now shifting, we could be at a good entry point for investors. Even if they aren’t expected to return to the ultra-low levels experienced post-2008, interest rates have been coming down. This could prove supportive for the sector, particularly when combined with government housing policy.
Government plans to “get Britain building”
The government has promised to build 1.5 million new homes before the next general election – part of an effort to boost housing supply and economic growth. While progress so far has been slow, housebuilders could benefit from this policy.
“Housing is a basic human need and the UK simply does not have enough of it. The historic underbuild stands at over three million homes and is growing every year,” said Kartik Kumar, part of the investment team for the Aurora UK Alpha trust.
The good news for companies looking to meet this demand is that competition is relatively muted. “Housebuilding is a notoriously difficult business to get into,” Kumar said. “No new national builder has emerged since the 1970s, and high barriers to entry help incumbents generate strong returns over the cycle.”
As well as housing targets, the government recently announced a permanent 95% mortgage guarantee scheme to help buyers purchase a property with a deposit of just 5%. Following encouragement from the regulator, mortgage lenders have loosened their affordability tests too, making it easier for people to borrow more.
There are some early signs that this could be boosting activity in the housing market. Buyer demand and agreed sales were up by 11% and 8% respectively on an annual basis in July, according to Zoopla. Experts at the property site say looser affordability tests are likely to have been a driver.
The latest Bank of England data also shows that 64,200 mortgages were approved in June. This is broadly in line with the pre-pandemic average, despite the higher interest rate environment. If sustained, more mortgage approvals could contribute towards a busier housing market – good news for housebuilders.
What are the risks with housebuilding stocks?
If interest rates come down more slowly than expected, or plateau at more elevated levels, that could dampen the outlook for UK housebuilders. A weakening in the housing market would be bad news too.
While there are some signs that activity is picking up in the property market following a slump earlier this year after stamp duty thresholds dropped, prices aren’t expected to rise significantly in the near term – at least at the national level.
Rightmove thinks house prices will grow by 2% in 2025 overall, while Zoopla and estate agency Savills are expecting 1%.
Things could look better over the medium term. Savills expects prices to rise by 24.5% over the next five years as buyer confidence improves through a combination of improving mortgage conditions and wage growth.
Of course, any number of events could derail this forecast between now and then.
As always, there are company-specific risks when selecting stocks too. Investors will remember that Vistry’s share price fell off a cliff-edge at the end of 2024 after it revealed building costs had been understated on a series of projects and issued three profit warnings.
Aarin Chiekrie, equity analyst at Hargreaves Lansdown, said the stock has shown some signs of returning to life in the first half of 2025, “flexing its size and scale to secure better prices with suppliers and keep build costs under control”.
Despite this, investors may want to exercise caution until it is clear the governance issues that led to the problems at the end of 2024 are truly a thing of the past.
Should you invest in UK housebuilders?
Low valuations could present a good opportunity for investors who want to take advantage of a possible rerating in the sector.
“A dash back to the two-times multiples that prevailed during the go-go years of ‘Help to Buy’ seems unlikely for some time, as that period generated supra-normal profits, but even steady profit increases should mean NAV rises over time, giving some scope for capital gain,” said Mould.
In his view, “generally healthy balance sheets mean there is something for income-seekers to research too”.
Morningstar recently highlighted Persimmon as its top pick among the UK housebuilders. Analyst Jack Fletcher-Price says the stock was the “most affected among the peer group by the soured UK housing market conditions of 2023”, meaning the recovery could be significant.
Given the nature of its target market, Persimmon is also well placed to benefit from government policy. “Persimmon is particularly exposed to lower-value housing and first-time buyers, representing some 50% of its sales,” Fletcher-Price said.
At market close on 14 August, Persimmon was trading at £11.01 – significantly below Morningstar’s fair value estimate of £16.80.
Bellway could also be worth a look for investors interested in the sector. The company shared a positive trading update on 12 August, with its forward sales up 8% compared to a year ago at £1.5 billion – the second consecutive increase.
The number of housing completions and the average selling price both came in slightly ahead of the company’s previous guidance, and Bellway expects completions to rise by a further 5% over the next year.
Bellway is currently trading at £24.60, versus Morningstar’s fair value estimate of £38.50.
As well as the housebuilders themselves, investors could consider some of the companies that exist as part of the broader housing ecosystem. Holding a diversified range of companies within the theme could help mitigate risks.
“We’re generally keener on house build volumes than we are on housebuilders,” said Alex Wright, manager of the Fidelity Special Values investment trust. “We’ve got Genuit, Howdens, DFS, Norcros – companies which play into house build volumes rather than house prices, which are just very interest-rate dependent.”
“If interest rates fall dramatically from here, house builders will do well but we don’t have a strong conviction that that’s going to happen. That’s a macroeconomic variable,” he added.
