Recent data from the Halifax House Price Index showed that house prices in the UK declined by 3.1% in April. This is the largest monthly fall since 2010 and shows that uncertainty remains high for the property sector.
However, this could present an opportunity for long-term investors to buy while property-focused stocks such as housebuilders are trading on low valuations. While further falls in the housing market cannot be ruled out, the long-term outlook for the industry remains positive due to government policy, monetary policy and a continued imbalance between demand and supply.
House price growth
While the 3.1% fall in house prices in April made the headlines, the monthly figures have always been volatile. For instance, in March house prices increased by 1.6%, and they are still rising by 2.2% on an annual basis. Therefore, the situation may not be as grave as various media outlets purport it to be.
Furthermore, the housing market is likely to be supported by government policy. New-build properties could see robust demand due to SDLT (stamp duty land tax) relief for first-time buyers, while the Help to Buy scheme is set to remain in existence under the current government. These policies have the potential to shelter housebuilders from the wider housing market to some degree, and may allow them to deliver rising profitability.
Monetary policy may also remain favourable. UK interest rates may be forecast to rise over the coming months, but they are expected to be just 2% in 2020. This suggests that mortgage availability could remain high and demand for housing could be more robust than many investors are anticipating.
Additionally, with there being an imbalance between demand and supply which is expected to widen over the coming years as population rises at a faster rate than houses are built, the prospects for the wider housing market seem to be positive.
Against this backdrop, housebuilders such as Bovis (LON:BVS) and Redrow (LON:RDW) could offer high total return potential. The two companies are forecast to deliver annualised earnings growth of 26% and 12% respectively over the next two years. Despite this, they trade on PEG ratios of 1 and 0.9 respectively. This shows that they may be mispriced by the market, and may offer higher capital growth than house price data suggests.
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Furthermore, the two companies could become sound income stocks over the medium term. Bovis is expected to have a dividend yield of 8% this year, while Redrow’s dividend growth could be high due to it having a pay-out ratio of just 24% last year. It is due to yield 4.5% in 2019, with more dividend growth seemingly likely beyond next year.
With mortgage approvals falling by 1.4% in March, further declines in UK house prices could be ahead in the short run. This may put pressure on the share prices of companies operating across the sector. But with low valuations, solid forecasts and relatively high income returns in the meantime, the prospects for housebuilders such as Bovis and Redrow continue to be appealing.