In addition, recent indicators such as the Nationwide House Price Index and Council of Mortgage Lenders lending figures appear to indicate that UK residential house price declines are bottoming out.
Colin Morton, investment director at Rensburg Sheppards, said that until about three months ago Rensburg UK Mid Cap Growth Trust had been overweight the house building sector but within the last six weeks it was decided to take some profits on its house building stocks so that it is now underweight the sector. Although the fund does not have any house builders in its top ten holdings it still has exposure to Bovis Homes and Persimmon.
Morton said following a rise in the valuation of these stocks the exposure was reduced. Rensburg’s UK Managers’ Focus Trust has also benefited from the sector with Bellway among the ten stocks providing the best returns six months ago and Persimmon among the ten stocks providing the best returns three months ago. However, Morton said the fund can now do better outside the house building sector.
He added that while a gradual improvement in UK house prices is likely share prices of house building stocks already reflect this as it is largely priced in, even if the market is bottoming. In addition he said that house prices may not have stopped falling even though the speed of decline appears to have slowed, and he does not believe house prices will fall as much as they have already.
In addition, house building stocks are unlikely to advance far in 2010, according to Morton, as the UK consumer and consequently housing market comes under pressure. The UK’s debt burden now stands at £801bn or 56.8 per cent of GDP, which will mean tax rises, public spending cuts or most likely both in next year - whichever party wins power at the next election.
Equity analysts at Panmure Gordon, meanwhile, have a 480p target price for Bovis Homes, whose share price today is 535.25p, and 228p on Persimmon which today is at 500.25p.
Furthermore, Morton does not expect a return to the extreme valuations in house prices of 18 months ago, when the average price was around six times the average salary, or return to a growth rate of around 10 per cent a year.
Derek Mitchell, who has recently assumed management of RLAM UK Mid Cap Growth Trust following the departure of Leigh Himsworth to Gartmore, also thinks the prospects for the house building sector are inextricably linked to the well being of the consumer.
He said: "Given that unemployment will continue to rise into next year, taxes and interest rates will go up, and a rising oil price will once again effect consumers’ disposable income, the outlook is not great. On top of all that, the cost of a mortgage - should you be able to get one - is also rising."
Mitchell added: "Therefore we believe that in the longer term the house builders will come under pressure."
UK Mid Cap Growth’s third largest holding is Redrow accounting for 3 per cent of assets as of 30 June.
But Mitchell said: "The reason for holding Redrow is because of the return of Steve Morgan to run the company. He ran Redrow successfully before, and we believe that he will improve focus within the group."
"The possibility of mergers & acquisitions should also not be discounted – Steve Morgan could have come back to either sell the company or to take advantage of distressed assets. And in the short term, housing shares will remain buoyant driven by an upturn in both viewings and mortgage approvals."
Neil Hermon, fund manager of the Henderson UK Smaller Companies OEIC and Henderson Smaller Companies investment trust also holds Bellway in the top ten holdings of both funds for stock specific reasons. It is the fourth largest holding accounting for 2.8 per cent of the assets of each fund as of 31 July.
He said Bellway has a strong balance sheet, net cash following a recent £44.8m raising, and a strong land bank. Hermon also thinks the company has good managers.
Compared to sector peers Barratt Developments and Taylor Wimpey, which have large debt burdens, the company is conservatively financed.
Hermon also believes Bellway could increase its market share and become one of the larger house builders as he expects a significant expansion in house building in the next two to three years.
He said: "In the long-term the housing market is structurally under supplied, while when markets are particularly negative about something it can be a good time to buy in. We bought Bellway between six and nine months ago as we thought the housing market could only get better while over the last twelve months the share prices of house builders have done better."
But he adds that Bellway is a long-term play because although housing transactions and market activity is picking up the housing recovery will be 'anaemic' in the short-term due to factors including rising unemployment.
However, Citigroup upped its target price on the stock to 910p and its rating to "Buy" at the start of August and predicts the company will match its 2009 performance in 2010.
Henderson UK Smaller and Smaller Companies also have a small exposure to Persimmon, which has substantially reduced its debt, and Bovis Homes. However Hermon does not plan to increase exposure to UK house builders.
While he believes the housing market will pick up he said he is only mildly optimistic for the sector.