The Lloyds (LSE: LLOY) share price has been steadily rising over the past few months. The movements have been so encouraging, the shares are knocking on the doors of their pre-pandemic valuation. There are a few reasons for this, the main one being the performance of the UK economy. I’m going to take a closer look to see if I think the Lloyds share price can keep rising and whether I should buy.
Lloyds the landlord
A key move by Lloyds over the past year has been entering the private landlord market. The bank has set the target of buying 10,000 new homes by 2025, and 50,000 new homes by 2030. This will be done through launching Citra Living. Lloyds has reported that one in five homes in the UK are currently privately rented, so entering this market seems like a smart move. The firm has already begun development and plans to acquire 400 properties by the end of the year, doubling that in 2022.
Citra Living has estimated that 10,000 homes would have a balance sheet worth around £4bn and would produce £300m in pre-tax profit. This would make Citra larger than the UK’s current largest private landlord, Grainger, which owns 9100 properties. If Lloyds meets its 50,000 target and these estimations are correct, the firm could be looking at an additional £1.5bn in profits. For context, it reported £3.9bn in profits in its 2021 half-year results. I would expect this extra cash to push up the Lloyds share price in the future.
However, the Bank of England (BoE) has recently announced it expects to see a sharp increase in mortgage payment defaults in the coming months. This is largely due to the end of furlough and cuts to universal credit. Lloyds is the UK’s largest mortgage lender. If defaults start increasing Lloyds could be in trouble.
UK economy boosts the share price
It’s no secret that inflation has been creeping up, caused by huge fiscal stimulus from the BoE in reaction to the pandemic. Recent statistics indicate prices have risen by an average of 3.2% over the past 12 months. This is well above the 2% target. Governor Andrew Bailey announced the BoE “will have to act” to control this. In practice, what this means is a likely rise in interest rates. The next Monetary Policy Committee (MPC) meeting is set for 4 November. Only after this meeting will we know exactly what the BoE is planning.
If rates do rise, it means banks like Lloyds can charge higher rates for lending. If they rise as early as November, I would expect the Lloyds share price to rise closer to 60p. And even if rates don’t rise this quickly, I would expect them to have risen by early to mid-2022 after the next few MPC meetings.
In my opinion, the bank is in a great long-term position for growth. Therefore, I think the 60p Lloyds share price mark will be reached and beaten at some point soon. Interest rates will be the shorter-term catalyst for this rise. If they tilt in the bank’s favour I think the Lloyds share price could soon rise again. Therefore I think this stock could be a solid addition to my portfolio.
