UK housebuilder stocks face a rocky trajectory, but could now be the right time to buy?
Investors deciding where to invest for 2025 might be reluctant to put their money into UK housebuilder stocks, especially given how susceptible they could be should inflation and interest rates rise.
There is no hiding from the fact that 2025 has started inauspiciously for UK housebuilders stocks. The FTSE 350 Construction and Building Materials index fell 6.9% between 31 December and 8 January, despite a huge spike on the first trading day of the year; since 2 January, the index has fallen 34.1%.
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Persimmon (LON:PSN) shares fell 5.1% in the year to 8 January, while Taylor Wimpey’s (LON:TW) share price is down 5.4%. The UK’s largest housebuilder Barratt Redrow (LON:BTRW) fell 2.8% over the same time period; both Barratt and Persimmon were upgraded to buy from neutral by Redburn on Friday 3 January.
Fears over the impact of incoming president Donald Trump’s policy agenda have weighed on housebuilder stocks in the US, and UK housebuilders could be similarly impacted.
The situation might not be quite the same for UK housebuilders, though.
For one thing, house prices are expected to continue to rise this year. Optimism around this prompted a surge in UK housebuilder stocks on the first trading day of the year; the FTSE 350 Construction & Building Materials Index gained 41.1% on 2 January, before falling back by 30.0% the following session.
“Housebuilders got a New Year fillip with data from Nationwide implying the UK housing market is in decent shape as 2025 gets underway,” said Russ Mould, investment director at AJ Bell, “with prices notably rising for a fourth month in a row in December”.
“However, early gains for the sector began to evaporate with investors’ eyes on the potential for a sugar rush of transactions ahead of looming stamp duty changes, with something of a crash to follow,” he added.
The slump was also precipitated by Bank of England data showing that mortgage approvals plummeted in November. Net mortgage borrowing by individuals fell by £1.0 billion during the month, to £2.5 billion. This did, however, serve to cancel out a £1.0 billion increase during October.
Why is now a good time to buy UK housebuilders?
Housebuilding formed a key pillar of the new Labour government’s pitch to the British electorate during the summer campaign, promising to build 1.5 million homes before the next general election. Investors can reasonably expect that the government will be as supportive as it can be to the sector, even if the target itself is a little far-fetched.
“The goal of building 1.5 million new homes over a five-year period looks a bit too stretching given where we’re at currently, but the ambition is commendable,” says Aarin Chiekrie, equity analyst at Hargreaves Lansdown. “Plans to ease planning consent should be especially favourable for housebuilders with large landbanks awaiting detailed planning permission, like Persimmon and Taylor Wimpey.”
Barratt Redrow was included in a list of 20 materially undervalued companies by Peel Hunt, in light of the synergies it envisages from its successful merger between Barratt Developments and Redrow last year.
Clyde Lewis and Sam Cullen of Peel Hunt wrote: “The Redrow brand adds a bigger, more expensive product to the range, and allows the group to tackle bigger sites more effectively, with three brands instead of two.
“In addition the group expects to deliver at least £90 million of synergies over three years, with £34 million from procurement savings, £33 million from divisional structure rationalisation, and £23 million from central/support function reductions.”
What are the risks for UK housebuilding stocks?
There are risks for UK housebuilders this year, though, especially given how unpredictable the macro environment is.
“Housebuilders’ fortunes are heavily influenced by mortgage rates and government policy,” explains Chiekrie. “With inflation rising above the Bank of England’s target in late 2024, and the incoming National Insurance increase likely to have an inflationary impact, there isn’t much room to cut interest rates sharply in 2025.”
The gilt yields crisis that has threatened to derail chancellor Rachel Reeves’ spending plans over recent days underscores the point that there is little prospect of the Bank of England making significant cuts to interest rates any time soon.
“Markets are still forecasting interest rates to sit above 4% by year-end, so there’s likely to only be a gradual lowering of mortgage rates this year,” says Chiekrie.
However, given falls in housebuilder share prices late in 2024 and early in 2025, “some valuations are now looking very attractive, so long as investors have the patience to ride out the inevitable ups and downs over the coming years”.
