Housebuilders suffer as brokers downgrade on valuations grounds

9th Jan 2015 08:56

Broker Jefferies was one of several to cut ratings on almost all the homebuilders, with Barratt Developments, Persimmon, Taylor Wimpey, Bovis Homes and others downgraded on the view that valuations were becoming too stretched.There has been a steady decline in mortgage approvals in recent months, with a peak of 76,000 last January to nearer 59,000 at the end of 2014 to the lowest monthly figure since the middle of 2013 as well as a slowing pace of house price growth as the government's Mortgage Market Review and recent curbs by the Bank of England on loan-to-income caps take effect.In December, UK house price growth fell further from its mid-year peak, with further cooling expected to come throughout the rest of the year, according to the monthly Halifax survey, which showed a fall in annual growth to 7.8% from a peak of 10.2% in the middle of 2014.A trading update by FTSE 100-listed Persimmon on Wednesday, with 23% growth in annual sales and "strong momentum" cited, seemed to run counter to concerns that the recent revival in the housing market is running out of steam, noted CMC Markets chief market analyst Michael Hewson.This pointed to a sector that "still appears to be growing despite worries that demand for new homes is being impacted by slowing house prices and reduced loan demand", he said."This has raised concerns that housing market activity could well be more subdued in 2015 as we head towards an election which is likely to be anything other than inconclusive. This slowdown in prices should not be treated as a bad thing though given how quickly house prices were threateningly to spiral higher in 2014, amidst talk of a bubble."However, with the outlook for UK consumer disposable income looking stronger and increasing evidence that wages are rising as well, other analysts argue that housebuilders are rightfully viewed in a positive light."Fair enough," said N+1 Singer equity sales partner Jamie Constable, "but I think the outlook looks fine which will mean that the strong income characteristics of the stocks and total returns to shareholders should remain good.""Let them settle down and then with an eye on valuation look for chances to buy."Next week, there will be trading updates from Taylor Wimpey, Barratt Developments and Bovis Homes.Hewson said if these blue chip builders paint a similar positive picture then the outlook for income and profits growth for all the major house builders would seem to remains positive, despite concerns about a mansion tax being implemented after the next election.