Sector Screener: a cheap housebuilder with long-term potential

While the FTSE 350 index has surged 10% higher in the past year, the Household Goods and Home Construction sector has slumped by 22%. Its 32-percentage point underperformance is somewhat unsurprising, of course, given that the sector includes UK-focused housebuilders at a time when inflation has been consistently above the Bank of England’s 2% target, interest rates have remained elevated and the economy’s prospects have been highly uncertain.

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In the short run, those same factors could realistically equate to further sector underperformance versus the wider index. Indeed, inflation is forecast to rise by around 100 basis points to over 4% by the end of March, with interest rate hikes increasingly likely. This could strain already uncertain demand for new homes, while the Budget on 28 October may yet further increase gilt yields and raise the cost of borrowing for prospective homebuyers over the coming months.

However, given the sector’s lowly valuation and the solid fundamentals of several of its members, could it still offer a favourable risk/reward opportunity on a long-term view?

Potential long-term catalysts

Although the economy’s near-term outlook remains challenging, its long-term prospects are surprisingly upbeat. Notably, inflation is due to fall to 2.3% by the end of next year following its short-term spike. This could prompt the Bank of England to pivot from the present discussion of interest rate rises to the consideration of interest rate cuts. If implemented, a more accommodative monetary policy should make homebuying more affordable, raising demand for new homes and acting as a catalyst on the financial performance of housebuilders.

The Household Goods and Home Construction sector’s long-term performance could also be catalysed by changing government policy. While fiscal policy and the Budget are clearly a known unknown in the near term, the recent announcement of a new equity loan scheme for first-time buyers may bolster demand for new homes. As well as directly boosting the financial performance of housebuilders, rising demand for new homes may also support higher house prices , providing a further positive impact on the sector’s performance.

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A lack of adequate supply of new homes to meet potentially rising demand could act as a further catalyst on the sector’s long-term performance. In the past two years, for example, the annual number of completed dwellings in the UK has fallen by around 12%. As a result, the number of dwellings that were completed during 2025 fell to its lowest level since 2014. Given the potential for build cost inflation to move higher in the short run, a worsening supply/demand imbalance of new homes could prompt higher house prices and aid profitability among housebuilders.

Source: ShareScope. Data at 12 October 2026. Past performance is not a guide to future performance.

Wide margins of safety

Having significantly underperformed the wider index over the past year, market valuations across the Household Goods and Home Construction sector are relatively attractive. Indeed, it is possible to unearth several members that trade at only a modest premium to book value. And even though their profits have come under pressure in some cases due to tough operating conditions of late, earnings multiples across the sector are typically low.

Wide margins of safety suggest there is scope for significant capital gains should potential long-term catalysts such as falling inflation, declining interest rates and more favourable government policies come to fruition. They may also mean that a tough near-term operating outlook has at least partly been priced in by investors.

With several sector incumbents having solid balance sheets, and in some cases with only modest net debt positions, they appear to have the capacity to overcome an uncertain economic period in the near term that may yet cause elevated share price volatility. And given the sound market positions of several housebuilders, notably via large land banks that are difficult for new entrants or incumbents to replicate, they appear to be well placed to capitalise on a likely improvement in trading conditions over the coming years.

A relatively low market valuation

Source: ShareScope. Data at 12 October 2026. Past performance is not a guide to future performance.

For example, FTSE 350 Household Goods and Home Construction sector member Persimmon (LSE:PSN) appears to have long-term investment potential. Even though the housebuilder’s shares have risen over 7% in the past year, thereby outperforming the wider sector by 29 percentage points, they still trade on a discounted market valuation.

For instance, they have a forward price/earnings (PE) ratio of 12.2 at a time when the FTSE 350 index has an earnings multiple of 17.7. Furthermore, the shares trade on a price/book (PB) ratio of 1.1 versus a figure of 2.3 for the wider index. Both figures indicate that Persimmon offers a wide margin of safety that could provide scope for an upward rerating and subsequent capital growth over the coming years.

Sound fundamentals

The firm’s financial standing suggests it may be worthy of a higher market valuation than at present. Its latest results for the first half of the current financial year show its net gearing ratio amounts to less than 5%. Alongside net interest cover of 9.8 during the six-month period, this indicates that the business is in a strong position to overcome an uncertain period for the wider industry.

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Its continued focus on vertical integration may also prove particularly useful in the near term given present economic conditions. For example, the company produces its own bricks, tiles and timber frame products that are used across its newbuilds, with the scale of vertical integration increasing in the first half of the current financial year. Greater control over its supply chain could help keep cost rises to a minimum during a period where an increase in build cost inflation would be wholly unsurprising.

Additionally, Persimmon’s improving competitive position means it may be undervalued. In the first half of the current financial year, for example, its market share increased following a 13% rise in total completions. Furthermore, the company’s land bank, which stood at around 81,000 plots at the time of its half-year results, means it is in a strong position to capitalise on a likely improvement in its operating environment over the long run.

Total return potential

Investors in Persimmon may, of course, need to be patient when it comes to improved financial performance. Although the company stated in its last results that it is on track to meet previous guidance for the full year, it is expected to deliver a meagre 1% rise in earnings per share (EPS) this year. This is set to be followed by a further increase in EPS of just 1% next year.

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However, with the company’s shares yielding 5% from a dividend covered 1.7 times by net profits last year, its income potential remains attractive. When combined with its capacity to deliver a sizeable upward rerating, this could mean that its total return is relatively appealing – especially as its operating environment gradually improves amid a prospective fall in inflation that could mean lower borrowing costs.

Clearly, the company’s share price could be volatile in the meantime. Indeed, further underperformance of the wider index would be unsurprising over the near term. But with sound fundamentals, an upbeat long-term industry outlook and a wide margin of safety, Persimmon appears to offer a favourable risk/reward opportunity.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.