As the financial world started to recover from the 2008 collapse, this column argued consistently for several years that every portfolio should include at least one housebuilder – mine has three. Despite the recent slide in shares in the sector, it is increasingly hard to argue that housebuilders are still cheap. We have potentially reached the end of this particular road.
Shares in housebuilders, particularly Barratt Developments (BDEV) which I hold, bounced last week after a broker’s note suggesting that the slide in shares since last October had gone too far. This proved a deadcat bounce when Crest Nicholson (CRST) rang alarm bells this week.
Crest reported flat selling prices and rising costs, a combination that is certain to reduce profits pretty soon. Many commentators have been warning that this would happen for some time but this is, to the best of my knowledge, the first clear tangible sign of trouble looming for housebuilders.
We need to see this in context: Crest has been heavily dependent on London in particular and the south in general, the areas that have led the way in soaring demand and rising house prices.
It is closing its Central London office and putting more effort into the Home Counties. But where London leads in housing, the rest of the country gradually follows, with the South East of England hot on London’s heels. I cannot see this move as heralding a great transformation.
House Price Rises Ripple Beyond London
Admittedly, the London market has not seized up entirely. Selling prices have made a small recovery according to the Royal Institution of Chartered Surveyors. (RICS)
Crest looks the least appetising share in the sector but that didn’t stop it dragging down its rivals. Even Bellway (BWY), which issued an upbeat statement including a forecast that it would sell more than 10,000 homes this year for the first time, suffered.
Disaster is not staring housebuilding in the face, at least not yet. The rest of the UK is still playing catch-up as the strong rise in London house prices ripples out and housebuilding continues to fall well short of demand. More houses are coming on the market as homeowners who held back for fear of selling into a falling market become more optimistic.
The Land Registry says house prices rose by 3.9% in the year to April, a sustainable rise though a slowdown from a peak of 8.2% two years ago.
However, what happens in London will happen elsewhere. The great times for housebuilders are giving way to a more subdued scenario. I wouldn’t even think of adding to my holdings in housebuilders until share prices have slipped a good deal further.
End of QE Should Help Banks
The financial world is getting back to normal. It’s just taking an inordinately long time.
Quantitative easing has long since ended in the US and UK and now the European Central Bank is concluding its buying of government bonds. The US Federal Reserve Bank has raised interest rates for the second time this year and is threatening two more rises before the year is out. The Bank of England may manage a quarter point rise in August, and even if it balks at that stage it will probably bite the bullet before the year is out.
Normalisation cannot come too soon for our battered banks. They tend to do better as interest rates rise rather than fall. And the days of hefty fines may be coming to an end.
Every portfolio should include a bank. Mine contains HSBC (HSBA) and Lloyds (LLOY). I consider the latter to be grossly underpriced and it is overweight in my portfolio. Provided it can avoid a renewed prosecution over the Qatari investment, Barclays (BARC) is also a reasonable prospect.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.
