UK set for housing recovery – which stocks could benefit?

Housebuilders have had a difficult few years, battling rampant inflation, higher interest rates, and weak buyer confidence.

But many of these challenges now appear to have eased from their peak levels.

Here’s how housebuilders have done recently and what could be next in 2025.

This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest.

Setting the scene

There was a gradual recovery in activity in the UK housebuilding sector over 2024. By October, mortgage approvals for house purchases were up 30% year-on-year, and transactions were up 5%, alongside a modest increase in house prices.

But influences like the UK Autumn Budget and disappointing economic growth numbers have acted to curb investor sentiment. This saw valuations in the UK housebuilding sector fall 27% from the August 2024 peak.

We think the lower valuations, alongside seemingly more favourable government policies, have created some opportunities in the sector.

That view has been backed up by recent results from housebuilders, where performance is showing signs of improvement.

Sales rates picked up over 2024, with many housebuilders posting double-digit uplifts, albeit from a low base.

New home completions have largely been towards the top end of guidance, and average selling prices have improved modestly. That’s put the housebuilders on solid foundations as we head into 2025.

Rates – what’s next?

Interest rates are back in focus.

Markets are forecasting a 0.25% cut to 4.5% in early February, before falling to 4.0% by the end of 2025.

But Labour’s tax and spending budget is likely to have an inflationary impact.

Donald Trump’s return to the White House could lead to a protectionism stance and the introduction of tariffs, both of which would add to inflationary pressures.

Alongside some already sticky inflationary signs, and concerns about the state of the Treasury’s finances, there could be the risk that interest rates don’t fall as quickly as currently forecast.

This would act as somewhat of a floor for mortgage rates, ultimately weighing on buyer affordability and overall demand.

Government support

While mortgage rates might not fall much this year, other areas are turning more positive.

The Labour government’s arrival has brought a major shift in political support for UK housebuilding. This comes in the form of a pro-growth rewrite of the National Planning Policy Framework, which widens the scope for developable land and sets ambitious build targets.

This likely means new land sources could become available for housebuilders.

With more land on the market, land prices could fall to more reasonable levels. Scooping up land at lower prices will have a positive impact on profit margins.

There’s a lag between buying the land and the positive impact on margins, given the time it takes to get any permissions needed and to build and sell the house. But we could start to see an incremental positive uplift on margins from 2026 onwards.

Another potential benefit should be a more favourable environment for housebuilders to gain planning consent. That would likely bring more new homes to market and help drive volumes and revenues higher.

This would be especially favourable for builders with large landbanks awaiting detailed planning permissions, like Persimmon and Taylor Wimpey.

Build-cost inflation

A few of the housebuilders called out that build cost inflation is on the rise again.

Several factors are at play here, including rising material prices, National Insurance hikes on labour costs, and the higher costs that come with making new homes more energy efficient.

This puts pressure on margins and can weigh on profitability if house prices don’t rise or costs aren’t trimmed in other areas.

The low single-digit build cost inflation we’re currently seeing is par for the course, so it’s not a major worry now. We’re cautiously optimistic it won’t get out of control, but it’s an area we’ll be keeping a close eye on as we move through 2025.

Persimmon stands out as one of the more resilient housebuilders in this regard. Its in-house materials division sets it apart from competitors, offering quicker and more cost-effective access to resources, which should allow it to navigate supply chain challenges with ease. For instance, over half of the bricks it uses are sourced internally, saving around £1,800 per plot.

Cash is king

Cash piles have been falling over the last year as builders dive back into the land market after several years of underinvestment.

Despite the decline, cash balances at most housebuilders look healthy enough to us for now and should support future dividend payments – a key attraction to the sector for income investors. But remember, dividends are variable and shareholder returns are never guaranteed.

On that note, Vistry is one company where we see scope for a wind back of its ambitious shareholder return programme.

The group had planned to return £1bn of cash to shareholders over a three-year period, through a combination of share buybacks and special dividends.

But after a string of recent disappointments and profit downgrades in late 2024, we expect to see that target reined back in some way. Management needs to work hard to improve internal controls and rebuild investor confidence.

What’s next for UK housebuilders in 2025?

On the whole, we’re positive about the outlook for the UK housebuilding sector.

We anticipate a steady pickup in buyer activity this year, while favourable supply-side dynamics create a promising backdrop for builders to potentially capitalise on.

We think there’s also plenty of pent-up demand, to soak up the increased output as it comes online. Brits are ideologically committed to home ownership and the country has been in a prolonged period of housing undersupply.

The late 2024 pullback in valuations in the sector has created plenty of compelling opportunities in the sector. Potential investors should focus on companies with a strong financial position, solid land bank and a proven management team capable of executing their strategy effectively.

Keep in mind that lower interest rates might not come through as expected. Macroeconomic and political uncertainty are other trip hazards to contend with. Potential investors should take a long-term view and be prepared for ups and downs along the way.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.

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