Sector Screener: rate cuts to aid two cheap housebuilders

Interest rates have been cut by 1.25 percentage points since August last year, yet the performance of several cyclical sectors, notably Household Goods and Home Construction, has been extremely poor. The sector, which contains several housebuilders, has declined by 21% over the past year. This represents a 36-percentage point underperformance of the wider FTSE 350 index.

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An uncertain period

Of course, it is perhaps unsurprising that interest rate cuts are yet to have their desired effect on the sector’s performance. After all, their impact is subject to a time lag of six to 18 months, which means even the very first decision to ease monetary policy 14 months ago may not yet have had its full effect on the economy’s growth rate.

Moreover, even though the era of interest rate cuts is well under way, bank rate remains relatively high at 4%. This means that the cost of borrowing is still significantly elevated versus its pre-Covid level, with higher borrowing costs continuing to act as a drag on the economy’s performance.

Indeed, GDP growth of 0.3% in the second quarter and similarly lacklustre rises over recent years, as well as an increase in the unemployment rate of 0.8 percentage points to 4.8% over the past year, are unlikely to be conducive to upbeat operating conditions for housebuilders operating in the Household Goods and Home Construction sector.

An upbeat long-term outlook

However, the sector’s prospects could be far stronger than many investors realise. Inflation is set to fall from its current level of 3.8% to the Bank of England’s 2% target within the next 18 months, according to the central bank’s latest forecast.

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This should mean that, alongside the aforementioned impact of past rate cuts, further monetary policy easing can take place that has a positive influence on the economy and, perhaps even more importantly, on housing affordability amid lower mortgage rates.

Lower inflation plus falling interest rates could lead to a continuation of the ongoing trend of positive real-terms wage growth. It has been above zero since April 2023, with further growth likely to provide greater scope for homebuying. And with a buoyant economy likely to ultimately lead to lower levels of unemployment, demand for new homes is likely to rise over the coming years.

Source ShareScope. Data at 27 October 2025. Past performance is not a guide to future performance.

Source ShareScope. Data at 27 October 2025. Past performance is not a guide to future performance.

Industry-related challenges

As well as being catalysed by potentially higher demand over the long run, the performance of FTSE 350 housebuilders may also be boosted by a lack of supply of new homes. While the government is targeting 1.5 million new homes to be built in England by 2029, new housing start figures suggest that there could be a growing supply/demand imbalance over the coming years.

Indeed, in the year to the end of March 2025, UK new housing starts amounted to around 139,000. This figure is 27% lower than immediately before the pandemic, with new housing starts amounting to 191,000 in the 2019 calendar year.

With the UK’s population forecast to rise by 490,000 people per year between 2022 and 2032, a continuation of recent numbers of new housing starts suggests that any existing supply/demand imbalance could realistically widen in the long term.

Attractive prices

Of course, risks such as an uncertain economic outlook and concerns regarding fiscal policy changes in the upcoming Budget could weigh on the sector’s performance in the near term.

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However, the underperformance of the Household Goods and Home Construction sector relative to the wider FTSE 350 index, means that several housebuilders currently trade on lowly market valuations that may adequately factor in potential threats.

Furthermore, in some cases housebuilders in the sector have solid balance sheets with net cash positions. This should mean they can overcome near-term threats. And with their share prices including wide margins of safety and them having an upbeat operating outlook amid interest rate cuts, falling inflation and stronger GDP growth, they could offer a favourable risk/reward opportunity on a long-term basis.

Source ShareScope. Data at 27 October 2025. Past performance is not a guide to future performance.

A lowly valuation

For example, sector incumbent Bellway (LSE:BWY) could offer investment appeal given its lowly market valuation. The FTSE 350 housebuilder trades on a price/book (PB) ratio of 0.9, which suggests it offers good value for money and has scope to deliver substantial capital gains.

Its modest market valuation further indicates that a recently launched £150 million share buyback programme is a logical move. It could provide support to the company’s share price after what has been, and could continue to be, a relatively volatile period.

Despite an uncertain industry environment, the firm’s share price has risen by 18% since first being discussed in this column during September 2023. This represents a 19-percentage point outperformance of the Household Goods and Home Construction sector, although it is still seven percentage points behind the FTSE 350 index’s performance over the same period.

Solid fundamentals

Bellway’s recently released full-year results showed that it delivered a 31% increase in earnings per share in the year to July 2025. Its performance was bolstered by a 14% rise in housing completions, with the firm expecting this figure to grow by a further 5% in the current year.

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The company’s financial standing, meanwhile, also improved during its latest financial year. It went from net debt of £11 million to a net cash position of £42 million over the 12-month period. And with net interest costs being covered 9.2 times by operating profits, it appears to be in a strong position to overcome near-term economic challenges.

A land bank consisting of over 95,000 plots, meanwhile, means the company may be well placed to capitalise on improving operating conditions as interest rate cuts ultimately have their desired impact on the economy’s performance.

A wide margin of safety

Similarly, sector peer Persimmon (LSE:PSN) appears to offer a favourable risk/reward opportunity on a long-term view. The FTSE 350 housebuilder’s shares have followed the wider sector lower over recent months, dropping 22% over the past year. They now trade on a price/earnings (PE) ratio of 13.7, which suggests they offer relatively good value for money at a time when the FTSE 100 is at a record high.

The stock’s valuation holds further appeal given its upbeat long-term outlook amid an improving economy and a potentially widening supply/demand imbalance for new homes. With a land bank totalling over 82,000 plots, it is well placed to capitalise on a more buoyant industry outlook.

Improving performance

Persimmon’s latest half-year results stated that it expects to have a net cash position of up to £200 million at the end of the current year. This suggests it is a fundamentally sound business that has the capacity to both overcome an uncertain economic period and invest for the long term.

The company also said in its half-year results that is expects housing completions to rise by 5.5% in the current year. It anticipates that they will increase by a further 6.7% next year, with falling inflation and declining interest rates likely to have a positive impact on its financial performance.

As with Bellway, Persimmon’s share price could experience a degree of turbulence over the coming months as fiscal policy changes play out and monetary policy updates take time to have their desired impact. But with both stocks having wide margins of safety, solid fundamentals and upbeat long-term prospects, their shares could deliver attractive returns in the coming years.

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