FTSE 100

Is the Barratt share price set to recover?

Could Barratt’s shares deliver an improving performance?

The Barratt (LON: BDEV) share price has gained over 5% in the past month. However, it is still down 10% over the past six months versus a 1% rise for the FTSE 100 index (INDEXFTSE: UKX).

Investor sentiment towards the FTSE 100 housebuilder may have been negatively impacted in recent months by an expected rise in interest rates. The Bank of England hinted that it would need to act to curb rising inflation. Higher interest rates could make properties less affordable, which may hurt demand for the new homes that Barratt builds.

However, the Bank of England failed to raise interest rates at their latest meeting. Clearly, this does not mean that interest rates will remain at record lows in the long run. But the apparently hawkish stance that the Bank seemed to have adopted over recent months may not have been a true representation of the challenges they face in terms of balancing price stability with economic growth.

Barratt’s share price rise over the past month could be linked to the lack of interest rate rise. In the short run, its performance could be impacted by changes to monetary policy. However, even if interest rates rise, demand for new homes could prove to be relatively robust. After all, homeowners spend around 30% of their disposable incomes on mortgage repayments. This is below the long-term average and significantly lower than the 45%+ figure from prior to the global financial crisis.

Furthermore, demand for new homes may be spurred on by a lack of supply. Despite many attempts at encouraging a larger number of housing starts, successive governments have failed to address the imbalance between supply and demand. As such, population growth over the coming years may contribute to a continuation of high demand for new homes that supports their prices.

Of course, a weakening economic outlook and high inflation could be bad news for Barratt’s share price. As the recent FTSE 100 index decline shows, investor sentiment can quickly change. And, with the pandemic not yet over, a return to lockdown measures that harms consumer sentiment and economic growth cannot be ruled out over the coming winter.

However, with the BDEV share price trading on a price-earnings ratio of 10 and its recent updates suggesting it is meeting previous guidance, it seems to offer an attractive long-term outlook. Certainly, short-term volatility may be high. But its operating conditions may support a sustained recovery in the coming years.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.