Housebuilders: is the worst over for these stocks?

A positive view on housebuilders including Barratt Redrow (LSE:BTRW) and Taylor Wimpey (LSE:TW.) has been flagged in the City after a leading bank said recent updates pointed to an improving backdrop.

UBS, which also has Buy recommendations on Bellway (LSE:BWY), Crest Nicholson Holdings (LSE:CRST) and Persimmon (LSE:PSN), believes volumes and margins are likely to have troughed and that it expects an inflection from 2025.

• Learn with ii: Inheriting an ISA | Can I transfer an ISA to someone else? | Open a Stocks & Shares ISA

From a valuation perspective it notes that the sector trades at 0.9 times tangible net asset value, compared to a long-term average of around 1.25 times.

Shares across the sector have fallen since last autumn, even though guidance on sales rates in recent results has offered encouragement heading into the spring selling season.

The year-to-date average growth reported by Persimmon, Taylor Wimpey and Barratt Redrow shows a year-on-year increase of 8%.

The bank is also encouraged by the supply side backdrop as government policy changes attempt to speed up planning and remove unnecessary blockers to infrastructure.

UBS said: “The key question from a supply side perspective is how quickly these changes will be seen by housebuilders to drive incremental sales outlet openings.

“The general view from UK housebuilders is that a material increase in planning permissions will take some time but planning is becoming incrementally more supportive.”

The bank noted comments by Persimmon at this week’s 2024 results that the true benefit will come towards the end of 2026 and into 2027.

• Persimmon makes more money than expected in 2024
• eyeQ: a FTSE 100 stock trading at a massive discount

The other side of the equation is the outlook for demand, which is less clear due to the constraints of affordability and house prices.

UBS said: “Key will be how mortgage rates and house prices trend from here, with UK housebuilder earnings highly sensitive to house price movements.”

Five-year mortgage swap rates have been volatile year-to-date and are now about 4%, which means affordability continues to be a headwind for demand in the short-term.

UBS added: “The reintroduction of demand-side stimulus would be a clear support for the sector, however this is not signalled by the government, for now.”

The bank’s analysis notes that volumes are 27% down on average against the 2022 baseline and that margins are down around 10 percentage points from 20.4% to 10.3%.

It said: “We expect this to mark the trough with volume growth and EBIT margin recovery expected on average for the year ahead.”

• FTSE 250 shares round-up: Trainline, Deliveroo and Volution
• The Income Investor: why I’m still a buyer despite dividend cut

In the company’s recent commentary on build costs, Persimmon signalled some inflation in price negotiations for 2025 but that it expects to restrict cost inflation to low-single-digits.

Taylor Wimpey said some build-cost pressure has returned and that it expects low-single-digit inflation for 2025, partly due to the impact of National Insurance increases on materials.

The bank has a price target of 155p on Taylor Wimpey shares, representing a lift of 38% on the trading level earlier this week. It has a 33% upside to 575p for Barratt Redrow, 29% to 1,540p for Persimmon and 51% to 3,500p for Bellway.

Crest Nicholson is rated a Buy with an upside of 46% to 220p, while Berkeley Group Holdings (The) (LSE:BKG) has a Neutral recommendation and price target of 5,385p ahead of a trading update tomorrow. Vistry Group (LSE:VTY) is rated as a Sell.