The property market has been remarkably resilient through the pandemic, but what are the prospects for housebuilding stocks in 2021?
Housebuilders face challenges
One of the more remarkable features of the past 12 months, along with the boom in online retail sales, has been that sales of new homes have remained strong as many people have looked to move out of cities and long, enforced periods of working from home have pushed others to reconsider their living requirements.
This activity has been reflected in house prices with recent data from the Office for National Statistics showing an 8.5% increase in prices in 2020, the highest annual rise for six years. It has taken the average house price up to a record high and the trend has been confirmed by data from other groups such as the Nationwide Building Society. Properties in the North West and Wales have seen the biggest increases in the past year, while London and the South East saw the smallest rises.
Recent results from the major housebuilders have also shown the robust level of demand for new homes. In January Persimmon reported a 25% rise in forward sales and Redrow announced a 20% increase in first-half revenue along with reinstating dividend payments. Rival Taylor Wimpey said it had returned to normal levels of production capacity towards the end of 2020 and forecast that full-year figures, due on 2 March, would be in line with market expectations. Barratt Developments has also sounded an upbeat note; reporting a record level of completions in the first half figures, along with a slight rise in pre-tax profits to £430m. Even better for investors was the news that the company has made a good start to trading in the second half of its financial year and dividends have been reinstated.
Another major factor behind the increase in housebuying activity is the temporary stamp duty holiday introduced by the Chancellor last year for properties up to £500,000. That spurred many into action, but it is due to come to an end in March and transactions which begin now are unlikely to be completed in time to qualify. There is concern that activity could drop away sharply, and some housebuilders are already noting signs of this. When the tax break ends although there is also speculation that the Chancellor might announce an extension to the scheme in the Budget in March, or possibly some other form of support for the sector.
Another concern is that it may be reduced by changes to the Help to Buy scheme this year. It has also been a significant driver of revenue for housebuilders in recent times. Many Conservative backbench MPs are keen for the government to encourage home ownership and help those who struggle financially to get a foot on the property ladder so there is considerable political pressure on the government to provide whatever help it can.
The need to replace dangerous cladding on some properties is also a challenge for some housebuilders and Persimmon has made a £75m provision to cover the expected cost of that.
On the positive side interest rates are likely to remain low for some time to come, which makes mortgages more attractive, and many housebuilders are slowly reinstating dividends. However, the housebuilding sector is cyclical and so the big question for investors is how quickly the UK economy bounces back from the pandemic and whether there is a legacy of high unemployment which reduces demand for houses.
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