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UK stocks: is it too soon to buy cheap housebuilding shares?

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Housebuilders are among the worst performing UK stocks over the past year. The sector is down around 35% over the past 12 months. Clearly, that hasn’t been positive for investors. But corrections also create opportunities.

So is now a good time for me to buy stocks in the sector?

What’s behind the fall?

All in all, 2022 wasn’t a bad year for housebuilders. But share prices fell on concerns about the macroeconomic environment as we approached 2023.

Rising interest rates, an end to the Help to Buy scheme, and the cost-of-living crisis are factors weighing on demand for homes. Meanwhile, building cost inflation is running at at least 5%. Therefore, margins are expected to come under increasing pressure.

Signs of the slowdown

Analysts have warned that house prices could fall by nearly 10% in 2023. Some experts have forecast a greater fall, but broader economic conditions, largely due to energy prices, appear to be improving.

House prices fell for four months in a row at the end of 2022, a sign that higher interest rates were starting to dampen demand. Property website Zoopla said that demand for housing had dropped by 50% in the year to December 2022. 

Figures from Halifax — the UK’s largest mortgage provider and part of the Lloyds Group — also showed a 1.5% fall in prices in December. Prior to that, house prices had fallen 2.3% in November, marking the largest drop since the financial crisis.

But asking prices have defied expectations in January, rising 0.9%, according to property website Rightmove.

Can housebuilders still prosper?

Housebuilders have provided further evidence of the slowdown. One of the biggest UK housebuilders, Persimmon, recently highlighted that forward sales were now down 36% to £1bn.

The day before, Barratt Development said that its total forward order book was 10,511 homes, against 14,818 a year previously, at a value of £2.54bn, compared to £3.79bn at 31 December 2021. 

For me, it appears that in the near term, there will be further challenges for the housebuilding sector. The CPI inflation rate was 10.5% in December 2022, so there’s no sign that cost inflation will be running at ‘normal’ levels for some time.

Also, double-digit inflation suggests that we’re unlikely to see interest rates fall, at least until H2. In fact, we’re likely to see further rises in H1. Moreover, this would mean that restarting the Help to Buy scheme would be irresponsible.

So would I buy housebuilder stocks now? Personally, I’m concerned about the next few months. But I’m expecting conditions to start improving towards the end of the year.

I already own several housebuilding stocks, but I’m not selling or buying. I’m going to hold on while keeping a close eye on the sector and the companies that appear best positioned to ride out the storm.

Vistry Group appears to be among the best performers so far. The group finished the year with forward sales standing at £4.6bn, up from £2.7bn at the end of last year.

The firm’s partnerships business has forward sales of £3.6bn — Vistry sees this segment as less sensitive to open market demand than housebuilding.

The post UK stocks: is it too soon to buy cheap housebuilding shares? appeared first on The Motley Fool UK.

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James Fox has positions in Barratt Developments Plc, Lloyds Banking Group Plc, Persimmon Plc, and Vistry Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and Rightmove Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.