Barratt and Persimmon have appeal as house prices reach record highs

2 mins. to read
Barratt and Persimmon have appeal as house prices reach record highs

Robert Stephens, CFA, discusses the prospects for housebuilders Persimmon and Barratt as house prices enjoy a ‘mini-boom’.

House prices increased at their fastest monthly pace in over four years in August to reach a new record high. They gained 1.6% so that the average house price stands at over £245,000.

However, rising unemployment, a weak economic outlook and the likely end of government policies such as stamp duty relief may mean it is a short-lived boom.

In spite of this, the long-term investment appeal of housebuilders Barratt (LON:BDEV) and Persimmon (LON:PSN) remains high in my opinion. Their valuations are low, recent results showed they have large net cash positions, while the long-term prospects for supply and demand within the sector appear to be positive.

Low valuations amid an uncertain economic period

The current housing boom could run out of steam in a matter of months. Pent-up demand from lockdown and government stimulus via stamp duty relief may only be temporary catalysts for house prices. As their impact evaporates, factors such as rising unemployment, weak consumer confidence and an uncertain economic and political environment may lead to less favourable growth from the housing market.

Likewise, long-term government support for the sector is a known unknown. Schemes such as Help to Buy are due to wind down over the next couple of years, and there is a risk that government policies may be less generous in future.

However, these risks seem to have been priced into the valuations of Barratt and Persimmon. While house prices are at record highs, the two housebuilders trade on prospective price-earnings ratios of 10 and 11 respectively. Indeed, the two companies reported improved performance since the end of lockdown. They are forecast to deliver double-digit earnings growth next year, which suggests that their valuations account for an uncertain outlook for the housing industry.

Long-term housing market fundamentals

The short-term outlook for house prices may be challenging. However, the long-term fundamentals that are likely to affect Barratt and Persimmon seem to be far more positive. For instance, housing starts continue to lag the growth in number of UK households despite a push to increase the number of new homes being built across the country. This follows decades of the supply of new homes failing to meet growing demand, and may lead to buoyant demand for new homes.

Furthermore, the UK is forecast to experience a long period of low interest rates. Alongside a competitive mortgage market, this may mean that homes are more affordable than it appears while house prices are at a record high. This may encourage first-time buyers to get on to the property ladder, since the proportion of their disposable incomes spent on mortgage repayments may not be excessively high in many parts of the UK.

Investing during an uncertain period

Undoubtedly, the two companies face uncertain near-term futures. However, their large net cash positions increase the prospect of them successfully overcoming threats in the short run to benefit from long-term housing market growth.

For instance, Barratt reported net cash of £308 million as at June 2020, while Persimmon’s net cash position was £820 million at the same date. Combined with sound long-term market fundamentals, they could offer good value for money at the moment in spite of a likely moderation in house price growth once the current mini-boom draws to its likely conclusion.

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