Do Taylor Wimpey and Bellway’s share price slumps provide buying opportunities?

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Do Taylor Wimpey and Bellway’s share price slumps provide buying opportunities?
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The share prices of housebuilders Taylor Wimpey (LON: TW) and Bellway (LON: BWY) have fallen heavily since the start of the year.

In fact, they are down by around 15% apiece year-to-date, compared to a 1% fall for the FTSE 100 and a 9% decline for the FTSE 250, as concerns surrounding the impact of prospective interest rate rises on the housing market have led to deteriorating investor sentiment.

While further share price falls cannot be ruled out in the short run, low valuations, sound financial positions and an upbeat long-term outlook for the housing market suggest recent declines for both stocks could present a buying opportunity.

A wide margin of safety

Indeed, Taylor Wimpey and Bellway’s share price declines mean they now trade on relatively low valuations. For example, Taylor Wimpey trades on a forward price-earnings ratio of just 10. Bellway, meanwhile, has a prospective price-earnings ratio of only 7.5.

Those figures suggest that investors may have factored in a likely rise in interest rates during the course of the year as the Bank of England seeks to curb the highest rate of inflation for 30 years. As such, the potential impact of a higher rate of interest on demand for new homes, in terms of making them less affordable for buyers, may already have been taken into account by investors.

Long-term opportunities

Moreover, housebuilders could face a relatively upbeat outlook over the long term. Even a rise in interest rates may be insufficient to significantly dampen demand for new homes. Around 30% of homeowner incomes are currently spent on mortgage repayments, on average, which is slightly below the long-term average.

This suggests that a modest rise in interest rates, which is forecast over the medium term, may not have an overwhelmingly negative impact on housing demand. In fact, it could even be argued that demand for new homes may increase as prospective buyers seek to act before likely interest rate rises come into effect.

Solid fundamentals

Taylor Wimpey and Bellway’s fundamentals suggest that they have the financial means to overcome a period of uncertainty. Even if rising interest rates, as well as geopolitical and economic risks, cause a slowdown in demand for new homes, their net cash positions of £837m (Taylor Wimpey) and £330m (Bellway) show that they have sound financial positions to capitalise on any subsequent recovery.

Furthermore, the prospect of ongoing government support, such as via the mortgage guarantee scheme, as well as the potential for changes to banks’ lending criteria, could act as further catalysts for the housing market over the coming years.

As such, while further share price volatility cannot be ruled out in the short run, the recent fall in Taylor Wimpey and Bellway’s market valuations could provide a long-term buying opportunity. Their low valuations, sound finances and opportunities for growth within the housing sector suggest they offer good value for money relative to the wider FTSE 350.


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Comments (1)

  • Tolle says:

    You have ignored the actions by Mr give to make all major builders pay to renovate the cladding on tower blocks. Cost of an awful lot. Taylor wimpey is one of the few who is arguing that they have remedial plans in place, so they should not be hit by a new charge.

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