Many investors are still hoping for a rally in the UK housebuilding sector. This has been the narrative since Labour's election victory in the summer. But despite the government's ambitious plans to expand the UK's portfolio of housing stock, the sector has struggled, badly.
We had some interesting feedback from Gary Channon, the investment manager of the Aurora UK Alpha investment trust, which is highly exposed to the UK housebuilding market. Channon said this attracts more attention than any other sector in which Aurora UK Alpha invests, but much of the commentary of this market is poor and often misleading.
Last year had a low output of new houses, which many believe is related to the events that happened during the year. Yet the output for 2024 is actually more of a reflection of land and building decisions that was made in 2022 and 2023, Channon reckons.
Interest rates and that Truss budget
Interest rates rose quite sharply from 0% at the beginning of 2022 to 5% by the middle of 2023, which had an immediate impact on mortgage rates, availability, and expected house prices. In the autumn of 2022, the former Prime Minister Liz Truss announced her first and only budget which nearly blew up the gilt market. It came as no surprise that housing executives at that time were cautious about their 2024 output, which stopped them buying land and slowed down the rate of future site openings.
"Given the stability that returned in 2023/4, we expect that housing output will improve during 2025 and, given the level of demand, so will revenue," Channon said. "The land going through the books by then for those with shorter landbanks, like Barratt Redrow, will have increasingly improved margins so this will show up in the reported earnings."
The sector had a bad fourth quarter in 2024 share price wise. Channon said he does not to try to attach fundamentals to share price movements, but accepted there were some news stories that did seem to cause the weakness in the sector.
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