UK house prices set to rise in 2016, but will housebuilder stocks continue rally?

UK house price growth accelerated more than expected in December, ensuring another year of strong growth in 2015, according to latest industry data. Forecasts are for further rises in 2016, but this doesn’t necessarily mean housebuilding stocks will continue a multi-year rise.

Nationwide, the mortgage lender, reports that UK house prices rose 0.8% month-on-month in December, the largest monthly rise since April. It compares with a 0.1% increase in November. Economists had expected a 0.5% rise in December.

Annual house price inflation climbed to a seven-month high of 4.5% in December after dipping to 3.7% in November from 3.9% in October. This is up from a six-month low of 3.2% in August.

London outperformed the rest of the UK with a rise of 12.2% year-on-year rise in the fourth quarter, compared with a 4.3% increase nationally.

“As we look ahead to 2016, the risks are skewed towards a modest acceleration in house price growth, at least at the national level, despite the likelihood of interest rate increases from the middle of next year,” says Nationwide’s chief economist Robert Gardner.

Howard Archer, chief UK and European economist at IHS Global Insight, agrees. “The stronger Nationwide data for December reinforce our belief that house prices are likely to see solid increases over the coming months. We expect house prices to rise by around 6% over 2016 amid healthy buyer interest, supported by largely decent fundamentals, and a shortage of properties. While latest mortgage approvals data for house purchases indicates that activity has recently levelled off, it is at a decent level following a pick-up over the first three quarters of 2015.”

It is notable that the Nationwide’s house price measure has been weaker than most other reports. At the top end, latest data from the Halifax show that house prices were up 9.0% year-on-year in the three months to November, which is double the 4.5% annual rate reported by the Nationwide for December.

What’s more, figures from the Land Registry, which is based on completed house transactions, show annual house price inflation rose to an eight-month high of 5.6% in November, from 5.2% in October, 4.8% in September and 4.2% in August (the lowest level since November 2013.)

Archer expects the upside for house prices to be constrained by more stretched house prices to earnings ratios, tighter checking of prospective mortgage borrowers by lenders and the probability that interest rates will start rising gradually during 2016, though he too believes higher interest rates are unlikely to have a major dampening impact on the housing market.

He says buyer interest will be sustained by increased earnings growth, high and rising employment, relatively elevated consumer confidence and still very low mortgage interest rates.

He adds that the shortage of UK housing stock is currently providing appreciable support to house prices. The latest survey from the Royal Institution of Chartered Surveyors reported that new instructions fell for the 15^th time in 16 months in November with the result that average stocks per surveyor fell to a survey low.

Nationwide, however, says that London is unlikely to experience another year of above-average price gains owing to a slowing price-growth momentum.

The top end of the London market is being crimped by recent changes to the so-called stamp duty, the house buying tax. The changes mean that buyers of more expensive properties are paying a much higher level of stamp duty.

Changes to the regime governing buy-to-let investments is also expected to hit the London market as well as other areas. From next April buy-to-let investors will pay an extra 3% stamp duty on top of existing rates. Landlords will also only now get mortgage interest relief on the basic rate of income tax.

Investors in FTSE-listed housebuilders have had a year to celebrate in 2015, thanks to the revitalised UK housing market and the fact and the housebuilders are selling more houses at higher average prices.

In fact, shares in the housebuilders have been rising strongly since 2012, having plunged in 2008 as the financial crisis and ensuing economic downturn brought house building to an almost complete halt. The companies focused on preserving cash on their balance sheets and their market valuations nosedived.

Taylor Wimpey is the largest housebuilder by market value, but can the rally continue?

Source: Thomson Reuters

The four FTSE 100 housebuilders are all in the top 10 individual stock gainers of the year. Taylor Wimpey is up 49%, Berkeley Group up nearly 46%, Barratt Developments up 33% and Persimmon up 32%. In the FTSE 250, property portal Rightmove and housebuilder Redrow are among the top performers over the year as a whole.

But shares have levelled out of late. Last month the broker Liberum warned that the incredible rally in housebuilder stocks over the last three years had run its course and valuations had become stretched.

Indeed, FTSE house builders were on the back foot on Wednesday morning even though the Nationwide house price data was better than expectations. The sector rose on Tuesday as traders decided it would likely benefit from the flood damage in the north of England.

The problem for the housebuilders is that comparative figures are becoming tougher each year, and therefore growth rates are set to slow. On top of that, they’re facing increased input costs, particular wages as there’s a shortage of skilled labour in the workforce.

The housebuilders remain positive about their own outlooks, but some analysts say market valuations are looking high and they’re expecting the rising costs to put pressure on profit margins in coming years.

The analysts community is far from unanimous on whether the rally is at an end. Two of the last three analyst ratings changes for Taylor Wimpey have been downgrades, but the most recent change was an upgrade. The latest three changes for Persimmon were all downgrades, while Barratt Developments has suffered a downgrade, and initiation at Buy, and an upgrade.

Persimmon shares are recovering after a two-month dip

Source: Thomson Reuters

Overall, four analysts have Barratt at Buy, seven at Hold, and one at Strong Sell, according to data compiled by Thomson Reuters. For Persimmon, there is one Strong Buy, nine Holds, three Sells and one Strong Sell. Two analysts have Taylor Wimpey at Strong Buy, five at Buy, five at Hold and one at Strong Sell, while one has a Strong Buy on Berkeley Group, three have it at Buy, nine at Hold and none at Sell.

While prospects for the UK housing market in 2016 appear to be positive, barring another economic downturn, prospects for housebuilder shares appear less certain. Can the rally continue, or will profit margins come under pressure as some analysts predict?

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