Data released recently has shown that the UK housing market is beginning to ‘normalise’. This means that the policies introduced by the Bank of England, which included a strict set of criteria being applied to potential mortgagees, is starting to have an effect. Indeed, both RICS and Halifax reported a marked slowdown in the pace of house price growth, with the threat of an interest rate rise in Q1 2015 also putting off many would-be buyers.
With this in mind, are Berkeley (LSE: BKG), Bovis (LSE: BVS) and Barratt (LSE: BDEV) still worth buying? Or should you avoid the sector completely?
The Right Policies
The new criteria being applied to mortgagees may be long-winded and time-consuming, but it seems like a sensible step. After all, irresponsible lending/borrowing was a major cause of the credit bubble that burst in 2007/2008 and led to a major recession. Furthermore, although an interest rate rise appears imminent, the Bank of England has been at pains to remind people that rates will not rise at a brisk pace. In fact, the Bank of England has gone as far as to suggest that a ‘new normal’ interest rate over the medium term of 2%-3% is more likely than the more traditional 4%-5%.
Therefore, it appears that neither policy is particularly designed to slow down the housing market to a great extent. As a result, it appears as though demand for housing could remain robust over the medium term.
A Housing Shortage
As well as robust demand, the housing market continues to benefit from a lack of supply – particularly in London and the south east. This situation doesn’t appear to be on the brink of changing substantially. Planning laws remain extremely cumbersome and, although the government has announced major new projects such as three garden cities, there remains a distinct lack of new houses being built. As such, a major imbalance between supply and demand looks set to continue over the medium to long term.
How Can You Benefit?
All of this is good news for house builders such as Berkeley, Bovis and Barratt. Indeed, they all appear to have very bright futures ahead of them.
For example, Berkeley focuses on prime London property, which could benefit from a weaker sterling moving forward. Indeed, the company is set to increase its bottom line by 6% this year and by 9% next year. With shares in the company trading on a price to earnings (P/E) ratio of just 10.1, this equates to a price to earnings growth (PEG) ratio of only 1.0.
Even better growth potential is on offer at Bovis and Barratt. For example, Bovis is set to increase its bottom line by 72% in the current year and by 32% next year. With shares in the company trading on a P/E of just 10.7, this generates a PEG of only 0.3, which is extremely low and very attractive.
Meanwhile, Barratt recently reported earnings growth of 115% for the full year and is expected to back this up with a further rise in the bottom line of 36% this year. With a P/E ratio of just 8.9, this translates into a PEG of only 0.2.
Therefore, with conditions remaining very much in their favour, it appears as though impressive levels of growth remain very achievable for Berkeley, Bovis and Barratt. With shares screaming value right now, all three stocks could prove to be star performers over the medium to long term.
