Stock market

3 charts that suggest now may be the time to consider FTSE housebuilders!

The downturn in the UK housing market has hit buyers and sellers hard. Unsurprisingly, this has also weighed on the share prices of the FTSE stocks to which the sector has exposure.

Take, for example, the three largest. FTSE 100. From May 2019, persimmon (LSE:PSN), Taylor Wempe And Barratt Developments 40%, 26% and 22% have fallen respectively.

But there are some encouraging signs that things are starting to pick up.

1. Mortgage Approval

In February, mortgage approvals were at their highest level for 18 months, according to Bank of England data. More encouragingly, as the chart below illustrates, they have now risen for six consecutive months.

At 61,325, they are still 27.5% below their five-year monthly high of April 2021, but I think the recent month-on-month improvement shows that confidence is slowly returning to the property market.

Source: Bank of England

2. Interest rate

The latest yield curve for government bonds (see below) shows a steady decline across all maturity dates. This is driven by the market perception that interest rates are likely to fall from their current levels.

Gilts are important because they are the standard against which mortgage providers price their products. Falling yields suggest that home loans are likely to get cheaper. This should help boost demand for new homes.

Source: Bank of England

3. Income

The chart below shows how real (after inflation) wages are starting to rise again.

This should make mortgages more affordable and, for those looking to get on the property ladder for the first time, encourage them to buy.

Source: Office for National Statistics

A potential beneficiary

If I’m right that green shoots of recovery are starting to appear, one company that should benefit is Persimmon. In fact, his April trade update included some positive signs.

Net private sales per selling outlet increased 6% in the first quarter of 2024 compared to the same period in 2023. There are plans to open more sales offices that reflect the Chief Executive’s vision that “Trade has been encouraging over recent weeks with strong visitor numbers and enquiries, giving us confidence for the remainder of the year.

On March 31, its order book was £1.14bn, up from £970m a year earlier. The average selling price of these forward sales was up 6% from the beginning of the year.

The company’s operating margins are also expected to remain unchanged in 2024. This is particularly good news as construction cost inflation was the main reason behind the company’s operating margin falling from 27.4% in 2022 to 14% in 2023.

Of course, there is no guarantee that the encouraging trends identified in mortgage approvals, interest rates and incomes will continue. And even if Persimmon builds 10,500 homes this year – at the upper end of its projected range – it would still be 29% below its 2019-2022 average of 14,712.

But with its strong balance sheet, over 80,000 plots to build on and a steadily growing order book, I think the company is well-placed to benefit from the housing market recovery that I expect. .


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