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Will Barratt's share price gain from 5% mortgages?

Barratt's [BDEV] share price has gained 27.5% since 22 September as the homebuilder benefits from a glut of good news, the latest of which is UK Prime Minister Boris Johnson's promise of 5% mortgages. Those considering Barratt’s share price will be keen to know how long can this positive momentum can last, however, especially with lenders already making noises about the practicality of the plans.

 

Barratt's share price and “generation buy”

Boris Johnson's promise last week to turn “generation rent” into “generation buy” has certainly got investors’ attention. In the announcement made at the Conservative Party Conference, Johnson promised that more first-time buyers would be able to get a mortgage with a 5% deposit.

While that's good news for Barratt’s share price, and other home developers, the question of how it will actually work in practice remains. The economic downturn has seen lenders withdraw most of their riskier mortgage products and go the extra mile in vetting new customers. Last month saw HSBC [HBSA] take their 95% mortgage off the market.

“When you consider that there is some nervousness among lenders regarding lending at 90% LTV, it will be interesting to see if anything comes of this scheme and how it will be structured,” said Mark Harris, CEO of SPF Private Clients.

For Johnson's pledge to have a long-term impact on Barratt's share price, investors will need details sooner rather than later.

 

Booming housing sector

Barratt's share price has benefitted from pent-up demand for housing and government help. According to a survey conducted by Nationwide, house prices surged 5% in September compared to the previous month, as buyers rushed to take advantage of the stamp duty holiday. This followed Bank of England data showing that mortgage approvals hit their highest levels since 2007. 

This marks quite a turnaround for what has been a year to forget for Barratt. In Barratt’s results for fiscal year 2020, the homebuilder completed 12,604 homes for the year, down 29.4% from 17,856 last year. Also lower than expected was profit before tax which came in at £491.8m, down 45.9% from £909.8m the previous year.

 

What does 2021 hold for Barratt’s share price?

Barratt's 2021 fiscal year has gotten off to a more positive start, with the homebuilder noting that “sales performance has been encouraging”. As of 25 August, net private reservations were averaging 314, compared with the previous year's 250. Total forward sales numbered 15,660 homes, compared to 13,064 for the equivalent period last year.

"The increased activity levels are being stimulated by a combination of pent-up demand, the Stamp Duty holiday and an understanding that Help to Buy will only be available to first time buyers and regional home price caps will exist from April 2021," Barratt said in its full year report

A resurgent economy and ongoing government support will be required for the housing sector — and Barratt's share price — to continue to thrive. Unfortunately, neither of these are guaranteed. Boris Johnson's promise of 5% mortgages may not materialise, while the stamp duty holiday is due to end in March. Any wobble in government support could land Barratt's share price in trouble. 

Barratt's share price has fallen over 25% since the start of the year, so there could be further upside on the horizon. Among the analysts tracking the stock on Yahoo Finance, it carries an average 609.25p price target. Hitting this level would see a 10.5% upside on Barratt’s share price as of 12 October’s close.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

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