The government’s flagship housing scheme – Help To Buy – has recently come under criticism for providing too much upward momentum to the house building sector. House prices jumped 8 per cent as a national average in the past year, with much of the growth skewed toward London and the south-east of England.
Governor of the bank of England Mark Carney said earlier this week that the housing market poses the biggest risk to the UK’s economic recovery, with David Cameron adding that he will consider changes to the scheme if directed by the Bank of England.
Funds that have held high exposure to the sector have done very well but investors should take profits before the cycle ends or government policy changes, Willis says.
“Many managers have moved out of house builders or reduced their positions considerably because indicators suggest that area of the market has done exceptionally well. We know what has largely driven: policy decisions such as Help to Buy,” he said.
“It is getting late in the cycle and you would have thought most active and high-conviction managers realise this and have moved out or at least actively reduced their positions.”
“[We feel it is time to] either top-slice or bank those gains and look for the next opportunity in the market.”
“The sector might have another 12 months or so to play out and managers might also find some niche ideas, but generally it is looking expensive and has largely played-out.”
Stephen Williams, equity analyst at Brewin Dolphin, agrees.
“It is difficult to avoid the conclusion that the recent outperformance of the UK housebuilding sector is coming to an end, although the capital return phase for investors is likely to be followed by income return as the delivery of profits and cash phase begins,” he said.
“In a classic case of it being better to travel than to arrive, our view is that the re-rating of the sector has mostly been played out.”
One manager who has recently sold-out of house builders is David Jane, manager of the TM Darwin Multi Asset fund, who is generally becoming more bearish.
House builder stocks have been some of the biggest winners in the FTSE All Share over the past few years, and funds with large positions in the biggest names have been heavily rewarded.
The gains of three of the biggest house builders – Persimmon, Berkeley Group and Barratt Developments – have eclipsed the performance of the FTSE All Share over this period.
Performance of stocks and index over 2yrs
Source: FE Analytics
However, in the past three months they have lost between 6 and 20 per cent, following concerns over the sustainability of rising prices. Over the same period, the FTSE All Share has stayed largely flat, rising 0.67 per cent.
Performance of stocks and index over 3 months
Source: FE Analytics
Seven funds in the IMA universe hold Barratt as a top-10 holding: Old Mutual Equity 1, Old Mutual UK Mid Cap, Old Mutual UK Smaller Companies, Dimensional UK Small Companies, J Chahine Digital Funds Stars Europe, Pictet Small Cap Europe and Scottish Mutual UK Stockmarket 3.
Persimmon is held by six funds in the IMA universe: Old Mutual Equity 1, Old Mutual UK Mid Cap, Old Mutual Dynamic Equity and MGTS Ardevora UK Income.
Fifteen funds hold Berkeley as a top-10 holding including Blackrock UK, CIS Sustainable Leaders, Franklin European Growth, Ignis UK Equity Income and L&G Growth.
Old Mutual UK Equity 1 and Old Mutual UK Mid Cap funds are therefore particularly heavily exposed to the sector, with a combined weighting to the two stocks of more than 5 per cent apiece.
The poor performance of the housing sector and Barratt in particularly has coincided with a dire three months for the two funds; FE data shows that both have lost over 10 per cent, putting them well behind the IMA UK All Companies sector average, FTSE All Share and FTSE 250.
Performance of funds, sector and indices over 3months
Source: FE Analytics
Brewin Dolphin’s head of research Guy Foster says preventing a housing bubble should be the current top goal of policymakers. That said, he thinks current concerns are greatly exaggerated and a crisis is far from imminent.
“Not only is it an emotional subject but it is also a base societal need – add the widespread use of debt in home purchase and it is easy to understand why property collapses are far more economically damaging than normal cyclical slowdowns,” he said.
He says it is crucial that the monetary policy committee continues to keep policy loose.
“Britain’s rebalancing would be dealt a significant blow by a rise in interest rates which would suck further capital inflows into the capital but reinforce the headwind suffered by exporters,” he added.