UK housebuilder stocks surge: should you buy?

Prime minister Andy Burnham has delivered a welcome lift to beleaguered UK housebuilding stocks ahead of the first Autumn Budget of his tenure with the announcement of a new scheme, which some analysts say could boost housebuilder profits by as much as 70% over coming years.

Hopes that UK housebuilders could benefit from a Burnham boost were vindicated when markets opened on 28 September, following the announcement of the Your First Home scheme aimed at helping first-time buyers get onto the property ladder. The equity loans scheme means you only need a 2.5% deposit, and can get a support of 20% from the government. But, to be eligible, you must purchase a new build from a housebuilder that is part of the scheme.

Shares in Persimmon (LON:PSN) and Barratt Redrow (LON:BTRW) rose around 16% and 13% respectively amid the news.

“The UK government’s new equity loan scheme could be the catalyst the UK homebuilding sector has been waiting for,” said Jack Fletcher-Price, equity analyst at investment research company Morningstar. “While the finer details will matter, anything that lowers the deposit barrier for first-time buyers should translate into stronger demand, higher reservation rates and a healthier market for new-build homes.”

The FTSE 350 Household Goods & Home Construction Total Return Index gained around 11% on 28 September, following the announcement of the new scheme. In the 12 months prior to its announcement, the index had fallen 13%.

What is the Your First Home scheme?

The Your First Home scheme aims to enable more people to buy their first home. It is similar to the Help To Buy scheme the Conservative government introduced in 2013 and which ran until 2023, with a second iteration introduced in 2021.

The new scheme will enable first-time-buyers to purchase a new-build home with a deposit of just 2.5% of its value, and to borrow up to 20% in a government-backed equity loan.

As well as being limited to first-time buyers, regional price caps will also limit the value of properties that can be bought using the scheme.

“The previous Help to Buy scheme supported more than 387,000 new-build purchases, with the vast majority of those by first-time buyers,” said Aarin Chiekrie, equity analyst at wealth manager Hargreaves Lansdown, “so a well-designed replacement could meaningfully lift demand and give builders confidence to start more sites.”

Chiekrie cautioned, though, that exact details of the scheme will be unveiled at the Autumn Budget on 28 October and that, until then, some buyers may choose to hold off, “so sales are likely to remain subdued in the meantime”.

What does Your First Home mean for UK housebuilder stocks?

While it is still a month until the full details of the scheme are announced, markets have been quick to assume that UK housebuilders will benefit from higher demand for new-build homes.

At its peak, the previous Help To Buy scheme supported around 40% of new-build transactions according to a research note from investment bank Peel Hunt. The analysis forecasts a 10% uplift in sales volumes by 2028 alongside a 200 basis point increase in gross margins. That could lead to an increase in earnings per share (EPS) of around 70% for the sector.

“We expect the biggest impact to be on sales volumes rather than house prices,” said Morningstar’s Fletcher-Price, “with Persimmon particularly well placed given its high exposure to first-time buyers.”

He added that Barratt Redrow “trades at an excessive discount to the peer group” and could therefore be an appealing option for value-focused investors.

Analysts at Peel Hunt, meanwhile, believe that Persimmon could see the smallest EPS increases among the sector and that Crest Nicholson (LON:CRST) and Gleeson (LON:GLE) could see the largest rises.

There will also be benefits along the housebuilder supply chain. Brick manufacturers Ibstock (LON:IBST) and Forterra (LON:FORT) derive around 60% of revenue from new builds, according to Peel Hunt, and as such could be key beneficiaries.