Why buying housebuilders’ shares beats buying houses

    27 May 2017

    Safe as ’ouses, as they say. The housing slump of 2008 seems a long time ago now. Prices across the UK, according to Nationwide, have grown 38 per cent since the nadir in early 2009; in London they have almost doubled. And even when you look back, the slump wasn’t that bad. It stopped quite a way short of a proper crash.

    I remember sitting with a carefully preserved pile of cash waiting to pick up a property at a distressed price — yet it was me who became distressed as banks started collapsing, threatening to take my savings with them. What I never foresaw was that the Bank of England would be so determined to dig us out of a housing slump that it would print money (by quantitative easing) and slash interest rates close to zero, keeping them there for what has so far turned out to be eight years. The apparent moral of the past decade is that bricks and mortar offer a one-way bet because homeowners will always be bailed out.

    So sinking my money in the housing market in 2009 would not have been a bad thing. But I could have done better still: by piling into housebuilders’ shares. Take Taylor Wimpey (see graph, above right), whose shares bottomed out at 5p in November 2008. They were recently trading at 200p. Anyone brave enough to have invested at the bottom would have increased their money nearly 40-fold.

    There was a good reason why Taylor Wimpey plunged: it looked at that point as if housebuilders might all go bust. Eighteen months earlier their shares had been trading at 400p — had you invested a decade ago you would still be sitting on a 50 per cent loss.

    Barratt shares tell a similar story. In 2007 they went above 1,250p, only to slump to 50p in 2008 and climb back to 615p this month. That’s a 12-fold profit had you invested at the bottom, but still a loss of more than 50 per cent if you’d bought at the top. Other housebuilders have done better over a ten-year timeframe, with Persimmon earlier this month up 53 per cent, Bellway 65 per cent and Berkeley 94 per cent.

    Here’s the paradox: while property itself has a reputation as a relatively secure investment (only twice in the past 70 years have values suffered a sustained fall in nominal terms) shares in housebuilders are among the most volatile on the stock market. They proved it again last summer when they dived in the brief post-referendum panic. Yet since then they have recovered strongly.

    Over the past decade housebuilders’ shares have been a supercharged play on the property market. Even in the hottest of hotspots you would have been better off buying housebuilders’ shares than buying property directly. Over one, three and five years the shares of every housebuilder have comfortably outperformed the value of the products they build. To take five-year performance, Taylor Wimpey is up 288 per cent, Barratt 309 per cent, Persimmon 243 per cent, Berkeley 134 per cent, Bellway 242 per cent and Bovis, the straggler, 83 per cent. Average house prices in the UK over that period are up 27 per cent, and London 63 per cent.

    Shares are also quicker and cheaper to buy and sell than property, with no solicitors’ and estate agents’ fees. Moreover, you can enjoy an income through dividends without the effort of managing a property. Your share certificates don’t need a gas safety examination and never have to be redecorated.

    All of which begs the question: why does anyone bother with buy-to-let when you can play the housing market so much more easily by buying shares? One reason why people might still prefer property ownership is gearing. Take out a high loan-to-value mortgage and you are doing your own form of supercharging returns — if you put down a 10 per cent deposit and the value of the property rises 10 per cent, you have doubled your capital. But gearing also works in reverse: if the property falls by 10 per cent, you lose your entire capital. So here, possibly, is the clincher: if you buy housebuilders’ shares, you can’t lose more than you put in, even if the firm goes bust.

    Of course, what’s happened over the past decade isn’t much of a guide as to what will happen over the next one. A risk to bear in mind is that buy-to-letters have become hugely important to housebuilders, particularly in London where a high proportion of new homes are bought by investors rather than occupiers; so a slump in buying to let could send shares tumbling.

    But really there’s nothing to say that housebuilders’ shares and property prices have to go up or down together, in spite of their obvious relationship. If you’re attracted to property investment and are confident that values will rise — as so many Britons apparently are — it is surely worth asking yourself: wouldn’t it be a lot less of a fag if I simply put the money into housebuilders’ shares instead?