The UK housebuilding sector has enjoyed a stunning run since the financial crisis. Companies such as Persimmon (LON:PSN) and Taylor Wimpey (LON:TW) have made gains of 227% and 207% in the last five years respectively, for example.
In future, additional gains could be ahead for both companies. Their low valuations, earnings growth potential and improved financial strength are all reasons why this could take place. However, it is government policy towards the housebuilding sector that could have the most significant impact on their performance.
Supply-side policies
While the government has sought to increase the number of homes being built in recent years, ultimately it has focused on demand-side rather than supply-side policies. Certainly, there are aspirations to build a significantly larger number of new homes in the long run, but at the moment there remains a major supply deficit. For example, there were 162,880 new homes started in 2016/17, with 147,960 completed during the same time period. While this is a ten-year high, it remains well below the level of demand.
In fact, over the next ten years the UK population is expected to increase by around 360,000 per annum. While that number of new homes may not be needed each year, the current level of supply still falls significantly below the required level. Therefore, it seems likely that the current imbalance between demand and supply will worsen in future.
Demand-side policies
At the same time as lacking supply-side policies, the government has introduced demand-side policies such as the Help to Buy scheme. This makes it easier for first-time buyers to put together a deposit for a new home and has been largely responsible for the improving financial performance of companies such as Persimmon and Taylor Wimpey.
The good news for both stocks is that Theresa May recently announced an extension to the scheme, with the Prime Minister aiming to help 135,000 first-time buyers onto the property market by providing £10 billion in funding. This could increase demand yet further for new homes and create an even larger supply/demand imbalance.
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In addition, the Chancellor recently announced that first-time buyers will no longer pay stamp duty on properties worth up to £300,000, with a reduced rate between £300,000 and £500,000. This could provide further fuel to the housebuilding ‘fire’ and ensure that demand remains robust over the coming years.
Investment potential
In spite of the potential tailwind from government policy, housebuilders are generally cheap at the moment. For instance, Persimmon has a P/E of under 11, while Taylor Wimpey’s rating is just 10. The two companies are forecast to deliver 5-10% in EPS growth in 2018, while they offer dividend yields that are in excess of 4%. They have also sought to improve their financial strength since the financial crisis, which means they may offer less risk than the market is currently pricing in.
Although the outlook for the UK economy may be precarious due to Brexit, government policy plus attractive company fundamentals could make housebuilders such as Persimmon and Taylor Wimpey appealing buys for the long run.
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