UK Homebuilders Brace for Sluggish Recovery

Although the UK housing market appears to be recovering, sluggish economic and wage growth leave investors questioning earlier optimism surrounding homebuilders.​

Homebuilders Face Rough Patch

Initially, investors expected UK homebuilders to benefit from the BOE's move towards easing monetary policy. Over the summer, there was hope that interest rates in the UK would drop significantly, reducing borrowing costs and attracting new buyers who had previously been deterred by high mortgage rates. While residential sales did experience a 10% increase in October in the wake of the first rate cut by BOE, stubbornly high inflation has prompted a reassessment of the pace at which rates will be reduced. This implies that mortgage rates could remain elevated for an extended period, potentially delaying the expected rebound in the homebuilding sector.

One factor delaying the rebound is that as interest rates fall, consumers may delay taking out a mortgage in the hope of securing even lower rates. UK wage growth has also begun to slow, with unemployment rising to 4.1%, according to revised data. This could leave prospective buyers feeling insecure, discouraging them from making a costly purchase like a home or opting for a more affordable property, which could put pressure on profit margins of homebuilders. Notably, 44% of prospective home buyers report being unable to afford a home at current prices, with 55% considering purchasing a less pricey option.​

Positive But Cautious Outlook

The recent BOE interest rate cut has already encouraged some individuals to enter the housing market, with mortgage approvals reaching their highest level since mid-2022 in October, coupled with the lowest average effective rate since May of the previous year. However, analysts suggest that the month was particularly active due to the expectation of finalising deals before the Budget announcement. Rates increased after the Budget, potentially leading to a slowdown in home buying towards the end of the year. Economists point to a gradual recovery in the sector, as they do not expect the BOE to cut rates this year. They even predict a very gradual approach next year, with only four rate cuts in total, a pace much slower than anticipated by other major central banks.

Not all homebuilders' performances are the same, as reflected in a recent analyst note from RBC Capital, which upgraded some firms while downgrading others. Overall, however, the broker suggests that there are more positive than negative factors once the short-term challenges are overcome. While the BOE's rate-cutting pace might be slower than expected, it is still expected to gradually reduce mortgage rates over time. The argument is that homebuilders might have been oversold in the aftermath of the budget, but a few might offer attractive valuations as a result. Traders may need to exercise patience to witness the expected rebound in UK homebuilders.​

Crest Nicholson Bottomed Out?

Crest Nicholson may have bottomed out after an extended period of decline in what appears to be a terminal wedge pattern at 145 pence per share. In November, the stock rose, bringing into focus the next resistance levels at 180 and 240, which may open up the possibility of extending gains towards the first peak of the wedge at 270 pence. However, failure to overtake the immediate resistance levels could result in a reversion to the local low, potentially retesting the wedge trendline or forming a double-bottom pattern.​

Source: SpreadEx / Crest Nicholson

Key Takeaways

The UK housing market is showing signs of recovery, but sluggish economic and wage growth have raised concerns about earlier optimism surrounding homebuilders. While interest rate cuts initially boosted residential sales, persistently high inflation has led to a reassessment of the pace at which rates may be reduced, hindering the expected rebound. Consumers are also deferring mortgage decisions in anticipation of further rate cuts, while slowing UK wage growth and prospective financial insecurity among prospective buyers continue to pressure homebuilders' profit margins. Although the recent rate cut has encouraged some individuals, analysts expect a gradual recovery as the BOE is expected to adopt a cautious approach to rate cuts. The overall outlook remains positive once short-term challenges are overcome, with Crest Nicholson's stock showing signs of bottoming out.