FTSE 100

Why has the Persimmon share price fallen 13% in six months?

The share price of FTSE 100 housebuilder Persimmon (LON: PSN) has declined by 13% in the past six months. By comparison, the FTSE 100 index is up 5% in the same period. This means that the housebuilder’s shares are 18 percentage points down on the index’s performance.

This underperformance followed a buoyant period for the company’s shares, as well as those of its sector peers. Investors seemed to be upbeat about rising house prices and policymaker assertions that interest rates would likely be maintained at a low level.

However, rising inflation and the end of the stamp duty holiday appear to have shifted investor views of Persimmon and other housebuilders. Although house prices continue to rise following the end of the stamp duty holiday, the Bank of England appears to have shifted towards a more hawkish stance regarding monetary policy. This could mean that with inflation above 3%, rising interest rates are likely over the coming months.

Higher interest rates are likely to make houses less affordable to borrowers. Investors may have taken the view over recent months that this could harm the trading conditions for Persimmon and that it represents a major risk facing the business; hence its share price decline.

However, the market is currently expecting a relatively modest pace of interest rate increases. Moreover, the proportion of disposable income used to repay mortgages is slightly below its long-term average. Therefore, it could be argued that unless there is a rapid rise in interest rates, house price growth may remain positive. In addition, demand for Persimmon’s new homes could be relatively robust.

Furthermore, Persimmon’s share price appears to factor in many of the risks it faces from rising interest rates. For example, the stock trades on a forward price-earnings ratio of 11. This indicates that investors may have priced in more challenging trading conditions for the business. Its cash position of £895m also indicates that it has the financial means to overcome a potentially weaker period for the housing market.

In the long run, a lack of supply of new homes plus rising demand from population growth could provide attractive operating conditions for Persimmon. In the short run, its performance is likely to be affected by the pace and scale of interest rates rises. As such, its shares could continue to be relatively volatile in the coming months but may offer relative appeal over 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.

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