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Investing.com -- Bank of America Securities sees a near-term slowdown in UK house price growth, with its newly introduced BofA UK House Price Growth Indicator pointing to weakening momentum.
"Right now, the Indicator points to a weakening trend: largely flat in Nov-24 vs Oct-24 but pointing down for three consecutive months in Dec-24, Jan-25 and Feb-25," the note states.
The indicator is based on six variables and has shown a strong correlation with UK house price changes since 1997.
“It is intended to help anticipate potential inflection points in UK house prices growth, which are likely to reflect the strength of demand and in turn could have implications on the margin trends for housebuilders,” BofA strategists said.
“We believe the UK home price growth, together with other factors (volume, sales momentum, etc), is another effective tool to help us gauge the health of the UK homebuilders market.”
The latest data already shows early signs of a slowdown, with UK house prices rising 4.1% year-on-year in January, down from 4.7% in December, while monthly growth turned negative at -0.5% versus +0.5% in the prior month.
The bank sees continued pressure on average selling prices (ASP) and cost inflation, which could weigh on profitability in the sector.
"With 5 out of 6 major UK housebuilders reporting their latest trading update, we see a (more or less) consistent theme on margin expansion pressure in the near term," the note highlights. Despite some recovery in sales volumes and private order books, higher input costs and ASP weakness remain key concerns.
Against this backdrop, BofA maintains a preference for companies with strong land bank buffers and attractive valuations.
The bank reiterates a Buy rating on Taylor Wimpey (LON:TW), citing its "quality land bank and leading dividend yield" while also favoring Barratt Redrow (LON:RDW) for its "cheap valuation (with limited share price downside risk) and the clearer earnings/synergies momentum conveyed during its CMD last month."
Looking ahead, BofA sees mortgage rates, government policy on housing support, and structural supply constraints as key drivers of the market.
While the bank expects house prices to rise by around 2% in 2025, it cautions that "volume growth needs to firm up before we will get more sustainable ASP growth."