- Oops!Something went wrong.Please try again later.
House price growth of 10pc over the past year has fuelled concerns of a bubble. After all, it is the fastest pace of growth since shortly before the last housing market crash in 2007.
However, in Questor’s view there are numerous catalysts that could maintain the upward trajectory of house prices over the long run. They could benefit housebuilders such as Redrow.
Notably, government policies should provide support to the housing market. The updated Help to Buy scheme and recently launched mortgage guarantee scheme mean that first-time buyers require only a 5pc deposit. As a result the schemes will help prospective buyers to overcome what has become a significant hurdle to purchasing their first home.
Their task will be further aided by today’s extremely low interest rates. The cost of mortgages has been reduced to such an extent that repayments make up around a third of the average UK salary despite house prices reaching record levels in recent months. This figure is similar to the 25-year average and suggests that mortgage repayments are currently affordable for many would-be homebuyers.
The Help to Buy and mortgage guarantee schemes are due to run until April 2023 and January 2023 respectively. Meanwhile, interest rates are not forecast to rise from their current level until at least 2024. Even higher inflation may be overlooked by the Bank of England as it seeks to aid the economy in its recovery from the pandemic.
The economy’s 5pc plus forecast growth rate in 2021 and 2022 could further catalyse demand for new homes through rising employment and higher wage growth. Recent lockdowns have prompted a period of record saving. This money may at least be partially used to fund first-time buyers’ deposits.
Redrow is in a strong position to capitalise on high demand for new homes in a post-Covid environment. It has adapted its strategy in line with recent market developments. For example, it has exited the majority of its London-based developments in response to growing demand among homebuyers for greater space than is normally found in the capital and the increasing popularity of home working.
The firm is financial stable, as evidenced by a net cash position that is expected to be more than £100m at the end of the current financial year. Its land bank consists of more than 26,000 plots and it is expected to accelerate land purchases in the coming months.
Redrow has achieved a five-star Home Builders Federation rating in each of the past three years. This reduces the prospect of future customer redress. Its investment in digital home buying services should appeal to an increasingly online-focused consumer and may reduce the impact of any additional lockdowns on its performance.
Of course, the prospect of further lockdowns remains a threat for Redrow and other housebuilders. Similarly, evolving monetary policy and government policy changes, such as planned updates to the stamp duty holiday at the end of June, could prompt a slowdown in activity in the housing market in the short run.
However, a population that is forecast to grow by 280,000 a year over the next eight years could cause a long-term exacerbation in the imbalance between housing demand and supply. Housing starts of 42,000 in the final quarter of 2020 suggest that demand growth could continue its long-term trend in exceeding the rise in supply of new homes. This would be likely to improve Redrow’s financial prospects.
The company’s valuation indicates a margin of safety in case operating conditions worsen in the short term. Its forecast price-to-earnings ratio of 10 and price-to-book ratio of 1.3 suggest that the stock offers good value for money in today’s bull market.
Undoubtedly, the past year’s double-digit annual house price growth is unsustainable. However, a mix of favourable monetary policy, supportive government measures and a lack of supply to meet growing demand could mean the prospects for Redrow, and the housing market, are significantly more positive than its valuation suggests.
Questor says: buy
Share price at close: 679.4p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.