Is the best over for UK homebuilders?

Politicians have argued recently about the existence or otherwise of a ‘magic money tree’.
 
But anyone owning shares in the UK’s mass-market homebuilders over the past six years could be excused for thinking they’d found one.
 
Look how the share prices of five major homebuilders have beaten the market since November 2011:

Source: Share price returns from November 25 2011 to October 30 2017 as per Google Finance. All return figures exclude dividends.
 
Who needs biotech start-ups or technology companies when you can buy shares in a humble stacker of bricks and mortar and make returns of over 500%?

Government guarantees

An astute question to ask is why am I measuring their returns over the past six years?
 
Indeed, it’s always worth questioning the timescales used to measure investment returns. You want to beware of people ‘mining’ the data over some seemingly arbitrary period, simply to put returns in the best possible light.
 
However, I chose the last week in November 2011 as the starting point for a specific reason. That was when David Cameron’s Conservative government first introduced a plan to prop up the then-ailing property market.
 
It’s hard to remember, but homebuilding companies were still in the doldrums in the wake of the financial crisis back in 2011, partly because many would-be buyers found it hard to raise a mortgage.
 
By guaranteeing high loan-to-value mortgages – as well as directing funds at a variety of stalled or otherwise strategic developments – the government aimed to get the market moving again.
 
Boy did it work! Both for the shareholders of homebuilders, but also for existing homeowners who saw a return to annual house price inflation.

Puffed up property

I don’t think the government’s intervention has been the only reason why house prices went up, or why homebuilders have done well since then.
 
The UK economy has done fairly well since 2013, and some of this might have been down to the improvement in the housing sector rippling across the UK economy. But even in property-mad Britain the direct contribution of building and selling homes is only estimated to amount to 3-5% of GDP. And this wider economic recovery will have played a major role in enabling people to raise mortgages and pay for houses.
 
Banks have become more willing lenders too, curbing the need for government-insured mortgages. That said, the state has remained active in the market via its various Help to Buy schemes. Investment bank Morgan Stanley last week released a report arguing that much of the £10 billion injected into the market by this initiative has gone straight into the pockets of the homebuilders.
 
Most of all, we can’t ignore years of very low interest rates. Experts say money hasn’t been this cheap for 5,000 years!
 
Low interest rates have kept mortgage repayments affordable in much of the country, even as house prices have recovered. In London and the South East, the benefit of low rates has probably been outweighed by much stronger growth in prices.
 
Can all this continue?

Things can’t really get better  

Housing is notoriously cyclical, and someday the fortunes of homebuilders will reverse.
 
There’s still an ongoing shortage of homes being built in the UK. According to property trade body the NAEA, the shortage of new homes in England alone will reach one million by 2022. It claims:
 

Since 2005, England has experienced a cumulative deficit of more than 530,000 new homes, with projections for the next five years predicting a shortfall of a further half million new homes as the gap widens.

That sounds bullish for homebuilders, but I wouldn’t get too carried away. I’m not predicting a crash anytime soon, but when a cyclical sector has had every wind possible at its back for more than half a decade, it can pay to be cautious.

The Bank of England has been signaling rates could rise for months. And with its tax changes to make Buy to Let less attractive as an investment, I think the government has signaled its awareness that house price growth and the affordability squeeze may have gone too far.
 
Someday we’ll see another recession. These are invariably bad for the homebuilding sector. A messy Brexit could also hurt these shares.
 
Betting against the UK property market has been impoverishing investors since the 1990s. But I’d be very surprised if they outpace the FTSE 100 to anything like the same degree between now and 2023.