Despite gloomy news from housebuilders, this column’s faith in three of them is undimmed

The housing market still has its challenges but Redrow, Bellway and Crest Nicholson all look cheap

After swingeing cuts to forecasts for completions and, by implication, profits and dividends from Persimmon and Taylor Wimpey at the start of the month, it might look to some investors as if the roof is caving in on the housebuilding sector. But this column’s faith in FTSE 250 builders Redrow, Bellway and Crest Nicholson is undimmed.

Granted, the outlook statements that accompanied the full-year results from Persimmon last Wednesday and Taylor Wimpey the day after were no thing of beauty and they added to the flow of gloomy news from the housebuilders that really started all the way back in the autumn when Barratt Developments flagged a drop in reservations.

Both Persimmon and Taylor Wimpey steered volume completion forecasts down by 30pc to 40pc, as they warned of the impact of higher interest rates, October’s chaos in the bond and mortgage markets and lower consumer confidence. An end to the stamp duty land tax holiday on certain properties and the Help to Buy scheme will not have helped either.

Meanwhile, higher input costs would also hurt, they cautioned, especially if weaker demand meant prices would not rise to compensate (and the Nationwide survey has flagged how house prices have started to stall and even slip a little, even if the Halifax version has been more upbeat). Add higher UK corporation tax rates to that unpleasant mix and Persimmon’s net profits are expected by analysts to more than halve in 2023, while the drop at Taylor Wimpey may be a little less than 50pc, again according to consensus forecasts.

Persimmon’s shares fell 10pc on the day, Taylor Wimpey’s didn’t flicker the day after and both price responses caught the eye. By rights investors might have feared more dramatic falls, given the scope of the downgrades to 2023 profits, both relative to the base set in 2022 and also analysts’ forecasts for the year ahead. Yet the response was relatively muted, because the shares of both had already taken a hammering in 2022, so such bad news was at least already partly priced in by the market.

This again takes us to the issue of valuation. As this column is wont to point out, there is an analysts’ rule of thumb that housebuilders may be cheap if they trade at one times tangible net asset value (NAV) per share or less and they may be expensive if their stock changes hands for two times book value or more.

That, in turn, brings us to Redrow and the other builders. Yes, Redrow withdrew its guidance for the year to July 2024 alongside last month’s interims for the year to July 2023, thanks to falling reservation rates

‘There is still clearly demand for good quality dwellings across the nation. And at some stage interest rates will fall’

and wider economic uncertainty. Yes, the valuation box on this page is deceptive, as analysts now expect decreases in both earnings and dividends at Redrow in fiscal 2024, so the price-to-earnings multiple jumps to 11 times for 2024 from six times forward earnings for 2023 and the yield falls to 3.9pc from 5.7pc, according to consensus estimates.

Yes, analysts see only a modest recovery in 2025. But the shares trade at 493p when net asset value per share is 565p, so the stock already trades at 0.87 times historic book value. Both Bellway and Crest Nicholson trade below one times NAV too and hence our decision to keep a firm grip on both of them as well.

The housing market still has its challenges, not least affordability. The average UK house price is £285,476 (according to Halifax) and that is simply too high a multiple of the average annual wage of £32,760 (according to the Office for National Statistics), at least unless interest rates are incredibly low, or banks are prepared to take on a lot of risk and go back to mortgages with very high loan-to-value ratios and the go-go days of zero deposits and 100pc-plus mortgages. After their experiences of 2007-09 the banks (and their shareholders) do not seem keen to embrace that level of risk, so at the moment the market does feel a little stuck.

However, there is still clearly demand for good quality dwellings across the nation. Mortgage applications are already at multi-year lows at around 40,000 a month and availability should slowly improve after the autumn’s Trussonomics upset. And at some stage interest rates will fall. Meanwhile, the builders look cheap and have net cash balance sheets, so they, and we, can sit out the storm and wait. Redrow, Bellway and Crest Nicholson could yet be a value package.