Strong Q3 fails to quash fears over housebuilder outlook

Housebuilder shares continued to soar in the third quarter, climbing 7.6% to bring the combined stock market value of listed housebuilders to £41bn.

The sector has enjoyed an exceptional run with share prices rising 38% over the past year to stand 19 times above the record lows of 2008, according to data from consultancy group Building Value.

The third-quarter performance was boosted by an exceptional final week in September when shares rose by 4.6% following leaked government plans to increase funding for the Help to Buy scheme.

In contrast to the previous quarter, when the standout share price gains of two companies, Countryside Properties and Watkin Jones, were head and shoulders above the rest, this time around gains were more evenly spread.

Berkeley Group and Persimmon led the pack in the quarter with share price growth of about 15% each.

Berkeley shares were boosted by a trading update, in which it said sale prices were ahead of expectations, and Persimmon’s share price growth was fuelled by strong interim results.

“Persimmon really does appear to walk on water. In its latest half year to the end of June, EBIT [earnings before income and tax] soared 30% and with it margins rose from 23.8% to 27.6%,” says Building Value chief executive Tony Williams.

Shares in only two companies, McCarthy & Stone and Inland Homes, went downhill in the third quarter compared with shares in four companies in the second quarter.

Sales slowdown

However, Williams questions whether the current boom in housebuilder shares can be maintained. He points out that the strong earnings growth enjoyed by the housebuilders will not last forever.

“Consensus earnings growth is forecast at 13% this year and next - but it is just 2% in 2019,” he says.

Williams is also doubtful whether the double-digit growth in earnings that are forecast for the next couple of years can be achieved.

Housebuilders may struggle to sell enough homes to meet such optimistic expectations in the face of an uncertain macro-economic outlook and rising inflation, he contends.

Persimmon really does appear to walk on water - it soared 30% in its half year to the end of June - Tony Williams, Building Value

Companies themselves have also expressed concerns over the state of the market in recent trading updates and financial results. For example, Berkeley stated in its latest trading update that the London market continues to be adversely affected by Brexit, the changes to stamp duty and mortgage interest deductibility.

And Taylor Wimpey warned in its results that the “outcome of the general election, combined with the ongoing Brexit negotiations, have resulted in greater political uncertainty and we are therefore alert to the political risk of a future change in customer confidence”.

Housebuilders’ shares may have reached an all-time high, but the sector seems to be preparing itself for much tougher times in the months ahead.

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