UK House prices are rising again and there’s a marked retracement in mortgage approvals which point to a much-needed recovery in homebuyer confidence. With the UK’s still-tight financial conditions abating, Morningstar see a housing market recovery drawing near. With a UK general election approaching, homebuilders are likely to benefit from recently announced election promises made by both sides of the political debate, Morningstar’s UK Homebuilders: Q2 2024 Pulse reveals.
“Labour has been more explicit in its proposed planning system interventions, pledging funding to increase planning officer headcount at local councils to get residential planning permissions flowing once more, and seeking to restore national housebuilding targets to meet at least the next 5 years’ worth of local housing demand.
Announced affordable housing policies could offer tailwinds for homebuilders with significant exposure to the affordable and/or first homebuyer segments of the housing market. Both Labour and the Conservatives plan to provide financial support for first homebuyers. This is constructive, especially for Persimmon (our top pick in the sector), as they are most exposed amongst our homebuilder coverage to this segment of the market as first-time buyers account for approximately 50% of sales. Regardless of the election outcome, homebuilders stand to benefit from increased investment in the space, creating value for the sector.” – Grant Slade, Equity Analyst, Morningstar
Key takeaways include:
- Homebuilder share prices no longer factor in the exceedingly downbeat outlook held by investors during the nadir of the UK’s housing market downturn. But the potential for superior risk-adjusted returns remains available to investors, with homebuilder share prices still not fully crediting the firming likelihood of a housing market recovery in the nearer-term, nor the longer-term opportunity for homebuilders in the coming decade.
- While homebuilding activity remains subdued thus far in 2024, various leading indicators point to a likely improvement in near-term housing market conditions. Constructive datapoints include house prices which are rising once more—having increased in each of the first three months of 2024. Housing market confidence and homebuyer demand are returning, as evidenced by the recovery in mortgage approvals in early 2024 towards levels not seen since 2022 when interest rates began to rise.
- Despite improving sentiment, the long-term opportunity for UK homebuilders remains underappreciated by investors.
- Labour seeks to increase other forms of affordable housing supply via reforms to compulsory land purchase rules that would allow local councils and housing associations to acquire land for residential development at below market prices. An increase in the availability of lower cost land for development as social or other forms of affordable housing bodes well for the likes of Vistry Group—which has recently made strategic moves to focus primarily on affordable housing development. Other players—such as Persimmon—which operate in the lower value segment of the housing market could also stand to benefit from development contracts granted by housing associations to develop on such sites.
- Persimmon is our preferred UK homebuilder, offering the best upside to improving UK housing market conditions and to potential housing policy. We see significant upside with Persimmon shares trading at a steep 38% discount to our GBX 2,300 fair value estimate.
- All UK homebuilders under our coverage rallied significantly in late 2023 as fixed income markets priced in a slew of Bank of England (BoE) interest rate cuts in 2024.
- While we appear to be past the point of maximum investor pessimism in this housing cycle, UK homebuilders still screen attractively, trading at an average 26% discount to fair value in early June 2024.
