House prices are forecast to fall up to 5% in 2020 as the housing market is affected by economic uncertainty. At the time we went into total lockdown, the share price of the FTSE 100’s big four housebuilders – Persimmon (LSE:PSN), Barratt Developments (LSE:BDEV), Taylor Wimpey (LSE:TW) and Berkeley Group (LSE:BKG) – had already fallen at least 43% from their year highs. However, I believe the long-term outlook for this sector remains positive, and now could be the perfect time to invest.
Short-term gloom
It is easy to understand why house prices are forecast to fall this year.
Supply of credit: The banks have tightened their lending criteria due to economic uncertainty, with nearly 50% fewer mortgage products available now than there were before lockdown. In particular, the number of lenders willing to offer 90% loan-to-value mortgages, essential for first time buyers, has shrunk dramatically.
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Supply of houses: All the big four housebuilders stopped working for a period during total lockdown. In the period since, they are working on much reduced outputs as they comply with social distancing working restrictions and supply chain difficulties. Therefore, there will be less houses ready to sell this year.
Long-term outlook
Despite the short-term pressure on house prices, there is plenty to be optimistic about.
There is a national housing shortage and, to help alleviate this, the government is targeting 300,000 new houses per year by the middle of the decade. To assist, it continues to bankroll the Help to Buy scheme for first-time buyers and, where appropriate, relax planning constraints to facilitate new developments.
Interest rates remain at historic lows, making borrowing cheap and affordable. Since estate agents re-opened in May, new enquiries have been better than expected, with people wanting more space to accommodate home working.
Cash is king
The short-term fall in the value of the big four housebuilders is contrary to their strong balance sheets.
Last year, they each had revenues in excess of £2.9bn and operating profits of at least 19%. However, it is their retained earnings (cash) of at least £600m that convinces me that they can still take advantage of the long-term opportunities in the sector once the storm passes.
Prior to the coronavirus outbreak, housebuilders were among the most generous dividend payers on the FTSE 100. Berkeley Group is now the only one of the big four that continues to make dividend payments. It is easy to understand why, as it has retained cash of £1bn and made 26% operating profit last year. It currently trades 23% off its year high and it is top of my watchlist in the housebuilding sector.
In summary, long-term demand, low interest rates, government support and excellent balance sheets all suggest an excellent long-term outlook for the big four housebuilders. I think demand for new houses will remain constant despite economic uncertainty, and house prices will stabilise. I believe the current share prices are currently too low and think now could be the perfect time to invest.
