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Why a house price crash is on the cards in 2017

The Motley Fool logo The Motley Fool 13/12/2016 Peter Stephens
Berkeley Group© Provided by Fool Berkeley Group

House price growth is a constant in many people’s minds. The idea that they could fall seems unlikely according to homeowners who have enjoyed a long period of profiting from bricks and mortar. However, things could be about to change. Just as during the credit crunch there was a crisis of confidence in the UK economy that hurt house prices, 2017 could see fears surrounding Brexit negatively impact on them.

A strong 2016

Of course, since the EU referendum the housing market has performed well. Evidence of this can be seen in today’s update from housebuilder Bellway(LSE: BWY). It has made an encouraging start to its new financial year, recording a 7% increase in reservations. It expects housing completions for the full year to increase by around 5%, while it sees demand for new homes being robust.

Bellway believes that the strength of the housing market supports further growth, with the mortgage market being competitive and the Help to Buy scheme encouraging a higher proportion of first time buyers to take the plunge. Even in London, where prices have already started to come under pressure in higher value properties, the company’s focus on affordably priced housing means that it has seen stable pricing in recent months.

A difficult 2017

However, this could be set to change. The UK economy is likely to experience major changes in 2017, which could negatively impact house prices. Brexit negotiations are set to be the centrepiece of these changes, since once Article 50 is invoked by the end of March the UK will enter a period of significant uncertainty. Its economic outlook will be extremely difficult to predict as the terms of the deal with the EU will be unknown for at least 18 months. During this time, investment in the UK is unlikely to be buoyant as investors are averse to uncertainty.

In terms of the impact on the housing market, higher inflation, higher unemployment and slower economic growth are likely to lead to a squeeze on consumer disposable incomes. This will inevitably make housing less affordable, since first time buyers will have less cash each month to pay for a mortgage. And with mortgage rates already at rock bottom and just a 5% deposit required in the Help to Buy scheme, there’s little help likely to be on offer from the mortgage market. As such, a fall in house prices is on the cards, simply due to reduced demand from investors and first time buyers brought on by Brexit.

A buying opportunity

Against this backdrop, buying housebuilders may seem to be a risky move. After all, their share prices could become extremely volatile next year. However, companies such as Bellway and Berkeley(LSE: BKG) offer wide margins of safety that mean that in the long run they could deliver high returns.

For example, Bellway has a price-to-earnings (P/E) ratio of 7.5 and Berkeley has a P/E ratio of only 7.1. Both of these figures indicate that the market has already priced-in a period of severe challenges for the housing market. As such, while a crash may take place next year, the two housebuilders may still be worth buying.

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Peter Stephens owns shares of Berkeley Group Holdings. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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