Analysts at Berenberg have chopped price targets across the UK housebuilding sector after cutting their pretax profit forecasts by around 40% on average after lowering their base-case forecasts for the market as a result of further declines in affordability.
They said there was too much optimism from other analysts on the shape and timing of recovery, with company valuations having fallen sharply but "not attractive enough for us to turn more positive on the sector".
Using their affordability model, the Berenberg analysts said they estimate that mortgage costs as a proportion of income have increased to 50%, well above the 20-year average of 36%, and close to the global financial crisis level of 52%.
"Indeed, if we make a cost-of-living inflation adjustment of c£3k, we think that this rate would spike to 55%. This rapid change in affordability remains the key driver of our cautious view on the sector," the analysts said.
They now model a 10% decline in volumes and a 5% decline in prices for the UK housing market, spread over 2023-24, and still expect 5% build cost inflation in 2023. On this basis, they expect average sector margins to fall by around 800 basis points (bp) – from 20% to 12%.
The Berenberg analysts said that with volume, price and margin weakness spread over the next two years, they do not expect earnings to trough until 2024.
However, they added: "Despite our view of an increasingly challenging operating environment, we note that the sector remains in robust financial health. We expect every company that we cover in this note to be in a net-cash position at year-end, which we estimate will remain through the next two years.
"Considering our more bearish forecasts for the housing market, we now think that land prices will fall c35% (against a prior estimate of c20%). This would be a good development for housebuilders and would help to facilitate mid-term margin restoration, in our view."
The analysts said they think that company valuations are fair, but not attractive enough for them to turn more positive on the wider sector given the continued macroeconomic headwinds and uncertainty.
The Berenberg analysts said they have made no changes to their stock ratings in the sector, reiterating a somewhat neutral and cautious view on the sector, with just two 'buy' ratings on Berkeley Group Holdings PLC (LSE:BKG) and MJ Gleeson (LSE:GLE).
Barratt Developments PLC, Persimmon PLC, Taylor Wimpey PLC, Bellway PLC, Crest Nicholson PLC, Redrow PLC and Vistry Group PLC were all kept on 'hold' ratings.