There are lots of good reasons to consider buying shares in UK housebuilders right now. A government pledge to build 1.5m houses combined with rising mortgage approvals is a powerful combination.
Despite this, I think there’s a big risk that means investors should be wary of these stocks. And in my view, there’s a better way to profit from a potential boost to the housing sector.
Reasons to consider housebuilders
The long-term outlook for UK housebuilders seems positive, with the gap between supply and demand unlikely to close any time soon. And there are also positive signs for the near future.
Key obstacles appear to be moving out of the way, both in terms of supply and demand. On the demand side, mortgage approvals recently reached their highest levels for 14 months.
Chancellor Angela Rayner has also reiterated the government’s intention to remove planning obstacles for new projects. This should mean housebuilders are able to produce greater volumes.
Combined with high dividend yields and low price-to-earnings (P/E) ratios, all of this looks like a strong reason to consider buying shares in UK housebuilders. But things aren’t that simple.
The big risk
All of the UK’s major housebuilders have been named in an investigation by the Competition and Markets Authority (CMA). The subject of the investigation is potential collusion.
I have no idea what the CMA might find, or what the outcome might be. But I think ignoring it entirely or assuming it won’t be a problem is a very bad idea.
The investigation into car loans for Lloyds Banking Group has been known about for some time. But investors who overlooked that were in for a shock when the stock fell 14% as a result.
Will something similar happen to the housebuilders in 2025? I think it’s impossible to know, but that means these stocks can’t be valued accurately and I therefore can’t invest in them.
A better opportunity
The prospects for the UK housebuilding industry might well be bright. But shares in a brick manufacturer – such as Ibstock (LSE:IBST) – are perhaps more appealing and I think this is one worth investors considering.
Like the housebuilders, Ibstock operates in an industry with a supply deficit. There’s a shortage of bricks produced in the UK, which means they have to be imported.
Bricks are heavy though, which makes them expensive to ship. And that gives local suppliers a big cost advantage over international competitors.
Ibstock isn’t the only UK brick manufacturer in the UK. But its scale and the strength of its balance sheet give it an important advantage over the competition.
Investing in the UK housing industry
Ibstock isn’t without risk – the threat of new building techniques reducing the need for bricks is something investors should consider. But I prefer this risk to an unspecified potential fine.
If the CMA investigation comes to nothing and the share prices of the UK housebuilders don’t move, my view would change. But for now, I’m staying well away from the sector.
The post Here’s why I’m avoiding shares in UK housebuilders like the plague appeared first on The Motley Fool UK.
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Ibstock Plc, Lloyds Banking Group Plc, and Vistry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
