When going about my nefarious business of active investing, I try to look out for divergences between real-world markets and their stock market proxies.
For instance, gold mining shares were doing poorly long before the gold price really fell from grace.
Similarly, UK housebuilding shares turned down before the house price wobble a few years ago. They came back much sooner, too, as I predicted they would.
The list goes on (and is burnished by hindsight bias, of course!)
One of the most intriguing potential disconnects at the moment is between the stock markets increasingly dim view of the housing sector and – until recently at least – the rabid enthusiasm and commentary about the strengthening economy, low unemployment, and the prospects for house prices, especially in London.
True, house prices have finally come off boiling point, but the stock market was growing increasingly grumpy about their prospects many months ago.
Now investors seem to believe that the entire UK-wide housing recovery is going back into the emergency ward.
Before considering why and whether it’s right, let’s have a look at a few sectors to see what I mean.
UK housebuilders
The government’s various supportive schemes – together with low interest rates and an economy and financial sector that at least stopped getting worse – did wonders for UK housebuilding shares in recent years.
I wrote in November 2011:
The government clearly wants more houses to be built – if only for the economic activity it generates – and most of us seem happy to keep paying an awful lot for those houses. Planning changes should also play into the house builders’ hands.
No guarantees, but I think housebuilders share prices will likely be much more upwardly mobile than general house price inflation over the next few years.
Since the date of that article the major housebuilders rallied between 100-300%. (If only stock picking always worked out that well! It doesn’t…)
However 2014 saw housebuilders’ shares stall or even decline before recovering a bit in the past few weeks, as the following graph from early 2011 to now illustrates:
Squint a bit, and you’ll see how the lines plateau in 2014.
I’ll discuss below what I think is going on here. The important point though is that positive press stories about UK house prices only really began appearing in 2013 – even in London it was almost a stealth price rally until 2012.
Share prices moved ahead of the market, in other words.
UK estate agents
The recent performance of this sector has been even more dramatic, with Foxtons (LSE:FOXT), LSL Property Services (LSE:LSL) and the much-smaller Winkworth (LSE: WINK) all getting the kibosh in recent months:
Investors in the listed UK agents have been gazundered.
This graph goes back to Foxton’s high-profile – and immaculately timed – flotation in September 2013.
Foxtons floated at what seemed a heady 230p but the shares still shot up another 20% on the day. In March they touched 400p, but you can now buy them for just 165p.
LSL and Winkworth, which are less directly exposed to the prime London market, have also seen their share prices fall.
UK residential home ownership proxies
Perhaps surprisingly, there aren’t many ways to invest in residential property via the stock market (probably because it’s hard to turf out sitting tenants in a liquidation crisis, though that wouldn’t be an issue for closed-end funds like investment trusts).
Some useful – imperfect – proxies are Mountview Estates (LSE: MTVW) and Grainger (LSE: GRI), which both own substantial portfolios of UK property, albeit discounted for various reasons.
Here’s a graph since 2011:
Mountview is a fair proxy for London property.
Grainger is a pretty diversified beast, but over the long-term Mountview is a fairly direct play on the fortunes of London property prices.
The thing to notice here is that Mountview isn’t fair off its highs seen in mid-2014 – and over the year the share price is still well up.
What does it all mean for the UK housing market?
So all you budding Bud Foxes (and foxettes), what do you reckon it means?
Is it time to yell “Buy, buy, buy!” into your PC monitor while soberly executing a few online share trades? Or would you be a seller? Should we even reconsider where real-world UK property is going based on these gyrations?
Probably not the latter, in my view, but the share movements do present an intriguing prospect. I’ll tell you what I think is going on, but I’m sure we can have a spirited conversation about it in the comments.
Reasonably people can disagree on, but I have come to believe that the UK does indeed have a shortage of the right homes in the right places. The recent recovery in housebuilding has barely dented this situation, especially when you take inward migration into account.
I therefore think the prospects for housebuilders still remain pretty solid over the next few years, assuming interest rates don’t truly soar or the economy flounder.
So why did their share prices wobble?
I am not convinced it’s a valuation issue. While they’re no longer cheap on a price-to-assets basis, most of the housebuilders still look a steal on earnings metrics. The market presumably doubts the good times can continue for years to come, perhaps because building costs will rise as well as the cost of home buying. This looks a potentially short-sighted view, especially in light of the big dividend policies declared by the likes of Berkeley that might help ward off a boom-to-bust cycle in the sector, as well as underpinning an investor’s returns.
That said, there are shorter-term factors at work, also.
Time to vote
Earlier this year, consensus was moving towards the ‘fact’ that interest rates were about to rise. Well, we all now know what happened there – bond yields have actually fallen!
I think there’s little doubt that this talk of rising rates did hit sentiment about the homebuilders. But tougher lending requirements stipulated by the Bank of England back in Spring has likely had a more concrete impact on the ground.
While the housebuilders have been stressing that their results are only coming off the ‘mega-gang-busters’ setting because it’s hard to improve markedly on last years super-gang-busters results, most do allude to financing being a bit harder for homebuyers to come by.
I noticed too that Bank of England governor Mark Carney said this week as an aside that the housing market had cooled more than he’d expected – or presumably planned for when they moved to cool it. So it is a factor.
Most interesting however – because it’s nailed-on as a short-term factor – is the upcoming UK General Election.
The estate agents in particular have pointed to this as a reason for the market slowing. They blame political uncertainty about, for example, the mooted mansion taxes, as well as wider qualms about whether we’ll remain in Europe. The latter could have a particular impact on the appetite of the foreign buyers who’ve bought heavily in the London new build market in recent years.
The housebuilders have also mentioned the general election as a factor – Redrow (LSE: RDW) and Henry Boot (LSE: BHY) just said in their latest updates that they think local planning decisions will be disrupted for political reasons until after May.
So the housing market does look set to slow – yet at the same time Mountview’s share price might be telling us that investors don’t see house prices falling much as a consequence, even in London.
Potentially then, this is an opportunity to buy the estate agents and especially the housebuilders. A six-month hiatus won’t matter at all to the latter in five years time – and the housing market is one of those where pent-up demand is typically unleashed once the clouds lift.
The picture for estate agents is a bit less clear to me, but their dividend yields look tempting if this is just a hiccup.
Set against all this, house prices in London and the South East still feel toppy. So that curbs my enthusiasm somewhat.
What do you think?
Disclosure: I currently have stakes in Henry Boot and Redrow of the shares mentioned. I’m considering taking stakes in other housebuilders as well as the estate agents.
Comments on this entry are closed.
Another way to buy a stake in UK res housing is Castle Trust Housa, though note it’s illiquid among other issues. It tracks the Halifax HP index. I bought some of this a while ago. Given my truly revolting track record with making money on housing compared to everyone else I’d imagine the market will tank when it falls due. I only bought a modest amount because UK housing still scares the bejesus out of me, but help to buy and all sorts seemed to hard to pass on.
> UK does indeed have a shortage of the right homes in the right places
There’s an alternative case to be made that we have a shortage of jobs in the right places. They’re all in London, and while the capital has about 10% of the population it’s got far more than 10% of the decent jobs. The Telegraph isn’t far off when it says the capital has become a workhouse for the young as well as being a magnet for financial and human capital.
Kind of odd that vastly improved communications have led to vastly increased geographical concentration and winner-takes-all effects. It certainly wasn’t the story that the academic papers were saying when I was working on optical transmission systems twenty years ago – we would all spread ourselves widely, build strong communities, wouldn’t have to commute far. What seems to have happened is that we all packed ourselves into the South East. It’s not that grim up North 😉
There is a fabulous thread over on house price crash tracking the price changes in Prime Central London (PCL), and then by extension Greater London. It looks like price increases in PCL stalled in the spring, funnily enough this coincides with the Duke of Westminister selling up (smart money exiting the building with full pockets). Right now asking prices are still way above the mental prices of even last year, but reducing. A tidal wave of property is hitting the market, particularly SW8 9 Elms area, and the Russians, Chinese and Arabs are all having buying difficulty. Interesting times, this is either a top or The Top, only time will tell.
The idea of the UK as an island of growth in a sea of European stagnation is just silly
There is no political will in Germany, Italy or France to stop Europe mirroring Japan 20 years ago and they control the EU
The UK economy has been running on increased public/private domestic borrowing plus overseas investment of capital and people (as immigration) for the last couple of years and it isn’t sustainable
Outside the bubble of London where most people in the UK live the signs of European style deflation are mounting: note the demise of the main-line supermarkets to Aldi/Lidl and the proliferation of voucher websites/moneysavingexpert.com
All of the major parties are now talking tough on immigration because they are scared of the 20% that UKIP can now reliably poll
The UK has a trade deficit of nearly 5% and a government spending deficit annually of £75-100bn
After the election there will be spending cuts, tax rises and lower immigration
If there is an EU referendum scheduled then all serious overseas investment will stop until then
I’d rather put my money into something not so dependent on the UK, even Europe itself
just get a few of theses and be done with it – http://www.tinyhouseuk.co.uk/
I’m applying for Quebec citizenship this month. Perhaps shares in builders will go up. Perhaps they will go down. I can offer you only this for sure: the UK will be a horrible place for kids to grow up in.
So speculate away as you fight over diminishing crumbs. And stay away from true wealth creation like a good Brit.
@Ben
Wow, I thought I was being grouchy 😉
Interesting review TI.
Will now keep one eye open on house-builders, though usually off-limits to our generally passive approach.
How much of an impact do you think web-based house selling sites will have on the turnover and profitability of the estate agents?
Does anyone here have any direct experience?
@magneto — Cheers. Actually, I could and probably should have added Rightmove (LSE: RMV) to the review, too. It’s down quite a bit this year, although I think it’s more connected with the self off in highly-rated growth style stocks since the spring.
Take a gander at Foxtons, they purely London exposed…. https://www.google.com/finance?q=LON%3AFOXT&ei=hTJmVIGUI6n5wAPo6YH4BQ
My biggest regret was NOT buying a 2/2 London flat in Knightsbridge back in 2005 when I had the chance.
I sure as hope property prices come down. Having a pied de terre in London would be sweet!
Sam
Neverland – make no apologies for hating the housing speculators. They are one step from human organ traders.
GBP down a fair chunk this week.
Enjoy: http://finance.yahoo.com/echarts?s=GBPUSD%3DX+Interactive#
@ Ben:
the UK will be a horrible place for kids to grow up in.
Fixed: the UK is a horrible place for kids to grow up in.
underscored – agreed. And still the middle-class clamor to trade paper with paper. Some are starting to understand now that their kids are stuck at home with no hope of ever leaving. Yet one minute later they would jump at the chance to make a quick profit housing to the detriment of other young people. It’s a deeply embedded fatal flaw in the UK psyche, entitlement to unearned wealth forged through decades of empire.
Collapse is utterly nailed on, no question in my mind.
Alright, that’s enough of that to be going on with cheers, we get the message. The Telegraph/Guardian/HPC forums to suit are available for those who’d like more of it — cheers for not forcing me to press delete on further off-topic comments in this vein, which I don’t really want to do. 🙂
These shares might be undervalued but I personally think they are still a big risk to buy. In 2009 they were a sure bet if invested in but only as a portfolio as there was a high possibility one or more of these companies dependent on housing sector would have gone bust.
I have to say UK might have its problems but it is still one of the most dynamic, wealthy and lovely countries to live in. You would find that other countries would have their own problems. There is no Shangrila in the world.
@ investor
It’s easily to underestimate just how sensitive the profits of a company of this sort is to sales volume. Profits only come to shareholders as dividends after everyone else gets paid
Don’t forget in 2009-2011 a whole bunch if these companies (including Foxtons) went into bankruptcy or had to make hugely dilutive rights issues (like Grainger)
@Neverland — Generally agree! 🙂 I held no companies of this sort going into 2008 except some banks (partly for sentimental reasons). Obviously claims are cheap on the Internet, but if you look at my housebuilder post linked to in the article, you’ll see I’m very aware of the cyclicality (which was why I was buying then).
I am not sure what’s happening with them yet — it’s the divergences between market views and the economy that are interesting to me here. It could well be that the market has sensed house prices are going to fall, rather than that it’s overly pessimistic about these companies. i.e. It could go either way.
That said both the agents and the housebuilders are in far better shape balance sheet-wise than before the last crash. There’s very little true debt in the sector, compared to many billions last time. Foxtons is debt-free for instance, and LSL only has a small amount and lots of cashflow. The builders are trickier to read because they can have some opaque obligations but in general they’re in great shape in terms of balance sheets, especially compared to the likes of Barratts that from memory had nearly £2 billion in debt before the last crisis. That’s just not the case at all today, so the risks are much lower from that perspective.
Thanks raj for reminding us how lucky we all are to live in the UK.
As regards house prices, here are some samples of Halifax House Price Index and RPI adjusted real house prices, which I post from time to time. Will update my sreadsheet when Dec 2014 figures arrive :-
Dec 1986 £42,262 30% below average
Dec 1988 £65,442 about average
Dec 1995 £61,544 33% below average
Dec 2007 £197,244 54% above average
Dec 2012 £163,845 10% above average
Dec 2013 £173,467 13% above average
These are UK average figures, so get outside of rampant SE England, and maybe a few other cities, and a more subtle picture emerges.
For those who are struggling to get on the ‘housing ladder’ and cursing, remember that the old gits like myself will one day be pushing up daisies, and you will be the only buyers in the housing market.
Your day will come!
Without looking at specific numbers, the critical things I would consider are these:
The housing market is not so free. The government does everything it can to prop it up. On that fact alone, does it make sense to fight the government by shorting the housing market? I wouldn’t be too sure.
Despite what everyone says, interest rates don’t *have* to rise, at least not to what used to be the norm pre-crisis. My feeling is the BoE has painted itself in a corner: anyone remembers forward guidance and how quickly it was abandoned? and how the planned time for a rate rise keeps being pushed back? All BoE is doing at the moment is managing expectations so that its own situation doesn’t get worse (people getting too complacent and taking too much risk). My prediction here is they will only rise interest very, very slowly. Maybe only 50 basis points at a time… heck I’d even bet it will be more like 25 bps. So this makes prices, at the very least, stable.
Having said that, for collective-sanity’s sake I think it would be healthy to see a bigger correction, a reversion to the mean. But that’s just wish of course. The condition for that to happen just aren’t there, considering the points above and the fact that unemployment is drifting lower and growth rates look meagre, yes, but stable. Also, remember the government (of any flavour) is subservient to the lobbying powers of builders, and builders interests are exactly the opposite of those hoping to buy.
As for myself, as a (recent) owner that’s all the exposure I want to have to the housing ‘market’. To those desperate to get on the ‘ladder’: don’t get mad, get even. Money is power, so don’t give it away too easily ;).
Speak of the devil and he shall appear… 🙂 From today’s Sunday Telegraph:
http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11232631/First-buy-to-let-investment-trust-to-float.html
> Speak of the devil and he shall appear…
A residential REIT, forsooth. Truly we are living in the End of Days…
Foxtons down 5% today. Tasty bear food 🙂 https://www.google.com/finance?q=foxtons&ei=oGRqVMG6K8e-wAODi4GwDQ
Great article.. Thanks
One, perhaps fundamental, point which seems to be missing from the analysis: about 40-50% of newly created money goes into mortgages, which set against a basically static housing stock is a big driver of house price inflation… As we have seen since the mid/late-90’s
Better explained here:
http://www.positivemoney.org/issues/house-prices/
Again, thanks – always enjoy your blog and would be interested on your thoughts
See? As I said, Mr. Osborne wants prices to go up and has made it slightly easier for you to acquire crippling debt 😉 with the new marginal stamp duty. He wants you to buy houses but he has to protect house prices for builders. Hey, who pays the bills in the end? Also any tax discount will be eaten by the coming price increases.