House prices dominate table-talk up and down the country and these conversations are as topical as ever since June’s EU referendum. Nothing quite sums up the post-Brexit zeitgeist than fretting over house prices - that and how much extra you’ve had to pay for your summer holiday.

But the value of homes and land is not simply a matter for dinner parties - it has implications for a number of blue chip and mid-cap British companies, including the likes of Barratt Developments (BDEV), Taylor Wimpey (TW.), Persimmon (PSN), Berkeley Group (BKG) and Bovis Homes (BVS) among others.

These were among the biggest fallers in the febrile aftermath of the Brexit vote, sliding as much as 40% as investors sought refuge from anything exposed to the UK economy. Since then there has been an improvement in valuations, but many housebuilders still trade below pre-Brexit vote levels.

At the time of writing, Berkeley is down 15% since the stock market opened on 24 June with the EU referendum result. Persimmon is down 8% over the same period.

Downturn concerns

Expectations for a downturn in the property market are driving investor decisions. There has not been a lot of data since the referendum, but what we have suggests a slight slowdown, with prices dipping 1% or so in July.

Normally this would not be something to worry about as the summer lull can often mean the market goes sideways for a time before the autumn rally. Since Brexit there are concerns that we are entering a cyclical downturn for the housing market, but the story of these housebuilders goes back a lot further than the referendum.

Buoyed by the recovery in house prices after the financial crisis, UK housebuilders hit record highs around late August/ early September 2015 from which they have declined significantly.

Bumper cash dividends and a rising market produced a rally for stocks that just wasn’t sustainable. For example, Barratt’s shares rose from 70p at the start of November 2010 to an eye-watering 634p by September 2015 - a nine-fold increase. Persimmon was up nearly seven-fold. For stocks whose earnings are notoriously cyclical valuations always looked precarious.

The Brexit vote rocked confidence in the UK economy and this hit property stocks hard. But housebuilders are 12 months into a correction. Brexit may have turned this (semi)orderly retreat into a rout, however this decline has been a long time in the making.

So why did these stocks begin sliding a year ago? Certainly investors were beginning to get altitude sickness as the top was being called around August last year. But house prices continued to rise by around 5-6% and earnings growth has been good - for example, Bovis reported another 15% jump in profit in the first half of 2016. Dividends have also held up, even if the cover is looking a little thin.

Animal spirits

The answer may be found in something that investors looking at price to earnings (PE) multiples and book values may overlook - animal spirits in the wider economy.

The peak for housebuilders corresponded with a top in UK consumer confidence. The GfK consumer climate survey peaked in late summer 2015 and has been dropping off since. Brexit saw the index go into freefall, but it had been cruising lower for nearly a year.

Property stocks are pure ‘confidence’ trades for investors -they’ve been the chief post-Brexit proxy trade for investors bearish about the future of the UK economy. So the correlation between consumer confidence and housebuilder shares makes sense over the longer time period, too.

So are they cheap? At between 8 and 10, the price to earnings (PE) multiples among these stocks are certainly favourable. Berkeley is trading on a forward PE multiple of 6.7 and has a 7.4% prospective yield, according to data from SharePad.

In a world of low yield, stocks with juicy dividends will
keep hungry investors interested. But there remains mixed appetite for property stocks despite offering some of the best dividends available.

The correction could have a little further to run and it may take a resurgence in consumer confidence before we see the bottom. There is not going to be any improvement until we know what’s happening Brexit-wise. And if dividends cannot be increased or at least sustained then there could be more sellers than buyers in this particular market.

Neil Wilson

Market Analyst at ETX Capital