Just how much lower can share prices in housebuilders go?
Analysts at Peel Hunt pointed out the sector has seen a 48% downturn this year with further falls coming today following a downbeat trading statement from Barratt Developments PLC (LSE:BDEV) which signalled that economic uncertainties were hitting its business.
AJ Bell investment director, Russ Mould noted: “If government ministers needed any evidence of how policy missteps can affect not just the financial markets but the real economy then Barratt Developments’ first quarter results statement provided it in spades.”
The housebuilder reported a fall in private reservations reflecting increased economic uncertainty, where the growing cost of living concerns have been compounded by increased mortgage interest rates and reduced mortgage availability.
“All three factors bear the fingerprints of both the government and the Bank of England and the drop in mortgage availability is a direct result of the financial market fall-out which followed the chancellor’s botched fiscal event of 23 September” Mould said.
Barratt said it remains on track to deliver pre-tax profits in line with the current consensus although the share price reaction - down around 6% in early afternoon trading - would suggest the market is not convinced.
But Mould pointed out that housebuilders’ valuations are already preparing for a deep downturn in the market, thanks to the combination of bloated house prices, rising mortgage costs and sagging consumer confidence.
Analysts at Liberum agreed. “Barratt and the sector trade at levels not seen since 2008/09 as the market prices in a period of house price weakness.”
They noted: "The outcome depends on how long mortgage rates remain elevated, and in turn how rate expectations change as the housing market slows the UK economy.”
Looking at the overall sector, Mould pointed out: “Only Berkeley and Persimmon now trade at more than one times historic net asset – or book -- value per share and the overall sector now trades on a forward price/earnings ratio that is way less than its dividend yield.”
“While that may be the market’s polite way of saying it thinks the earnings forecasts are too high or the dividend estimates are too generous, or both, the sector is in much better financial shape than when it last entered a downturn in 2007-09," he concluded.