UK housebuilder stocks rally: is it time to buy?

Shares in UK housebuilders have struggled this year. News that the government may revive Help to Buy now appears to be lifting the sector.

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Prime Minister Andy Burnham has given struggling UK housebuilding shares a welcome lift before his first Autumn Budget, announcing a scheme that some analysts believe could raise housebuilders' profits by as much as 70% in the years ahead.

UK housebuilders got the Burnham boost investors had hoped for when markets opened on 28 September. The trigger was the announcement of Your First Home, a scheme designed to help first-time buyers purchase their first property. Buyers need a deposit of just 2.5%, while the government provides 20% support through an equity loan. There is a catch: the property must be a new build sold by a housebuilder participating in the scheme.

Shares in Persimmon and Barratt Redrow rose by roughly 16% and 13% respectively on the news.

After the new scheme was announced, the FTSE 350 Household Goods & Home Construction Total Return Index rose by about 11% on 28 September. It had dropped 13% during the preceding 12 months.

What is the Your First Home scheme?

The Your First Home scheme is intended to help more people purchase their first home. It resembles Help To Buy, which the Conservative government launched in 2013 and ran until 2023, before introducing a second version in 2021.

First-time buyers will be able to purchase a new-build home with a deposit of just 2.5% of the property's value. The government will also back an equity loan worth up to 20%.

The scheme is available only to first-time buyers, and regional price caps will restrict the value of eligible properties.

"Help to Buy supported more than 387,000 purchases of new-build homes, most of them made by first-time buyers," said Aarin Chiekrie, an equity analyst at wealth manager Hargreaves Lansdown. A replacement scheme, if designed well, could raise demand and give builders the confidence to open more sites.

Chiekrie warned that the Autumn Budget on 28 October will reveal the scheme's precise details. Until then, some buyers may wait, meaning sales are likely to remain subdued.

What could Your First Home mean for UK housebuilder stocks?

The scheme's full details will not be announced for another month, but markets already expect UK housebuilders to gain from stronger demand for newly built homes.

According to an investment bank Peel Hunt research note, the previous Help To Buy scheme accounted for roughly 40% of new-build transactions at its peak. The analysis predicts that sales volumes could rise by 10% by 2028, while gross margins expand by 200 basis points. For the sector, that combination may lift earnings per share (EPS) by about 70%.

"We expect sales volumes to feel the main effect, rather than house prices," said Morningstar's Fletcher-Price. Persimmon looks especially well placed because so much of its business comes from first-time buyers.

He also said Barratt Redrow "trades at an excessive discount to the peer group," making it a potentially attractive choice for investors seeking value.

Peel Hunt analysts take a different view of the sector's earnings outlook. They expect Persimmon to post the smallest EPS increase, while Crest Nicholson (LON:CRST) and Gleeson (LON:GLE) could record the largest rises.

Housebuilders' suppliers should benefit too. Peel Hunt estimates that brickmakers Ibstock (LON:IBST) and Forterra (LON:FORT) get about 60% of their revenue from new-build construction, putting both companies among the clearest potential beneficiaries.