Barclays has downgraded a swathe of house-builders, saying expectations have got ahead of themselves.
The house-builder index is up 46% year-to-date, while the FTSE 350 is up less than 6%, and part of the reason is the market expecting the government to do something to help Britain’s youth get a foothold on the housing ladder.
Barclays notes that solving the UK’s broken housing market is easier said than done; the so-called “Help to Buy” programme has been more of a “Help to Sell” initiative that has inflated house prices to the massive benefit of house-builders.
The government has injected an extra £10bn into the scheme and Barclays reckons an extension of the scheme beyond 2021 seems likely.
“This could come with a lowering of the £600k price cap (ex London) or a first time buyer only restriction (81% of users to date). Although changes could be more onerous (user fees; lower equity loans), they would be at odds with the government’s aims. On this basis, we expect more of the same. In fact, we expect the government to seek more creative ways of enabling new home buying under the Help-to-Buy umbrella, fuelled by its need to stem the home ownership decline. Despite this, the builders face more problems building homes than selling them and tackling the real inhibiting factor (skilled labour shortages) is less easy,” Barclays suggested.
While ‘Help to Buy” has been a double-edged sword for those looking to get on the housing ladder, on the plus side, a raft of changes to Stamp Duty have benefited buyers of lower-priced homes.
“Future changes could include a first time buyer exemption (the first £125k is exempt already), the exclusion of private rented sector (PRS) investors from the 3% premium (as originally considered) and relief for downsizers (to redistribute housing more efficiently),” Barclays speculated.
With the Budget speech imminent, Barclays wonders whether the government will tighten the rules on adherence to the National Planning Policy Framework, which has made it much harder for local authorities to turn down applications to build new houses.
“We believe the government could tighten the rules on adherence, impose fines on those that don’t comply and speed up appeals,” Barclays said.
In summary, the bank does not believe the fundamentals for the sector have deteriorated; nor is it expecting the greater likelihood of interest rate rises to “upset the apple cart”; instead, it judges that recent share price performance leaves little scope for disappointment.
As a result it has downgraded Persimmon PLC (LON:PSN) and Berkeley Group Holdings PLC (LON:BKG) from ‘equal weight’ to ‘underweight’; Redrow plc (LON:RDW), Bellway PLC (LON:BWY) and Taylor Wimpey PLC (LON:TW. are downgraded from ‘overweight’ to ‘equal weight’.
The price targets for Berkeley, Redrow and Taylor Wimpey remain unchanged but Bellway (3,631p to 3,779p) and Persimmon (2,566p to 2,711p) see their targets hiked, reflecting recent share price strength.