The UK government plans tax changes that could impact the housing market. Persimmon is the top stock pick in the sector. Stocks under Morningstar coverage are undervalued due to weakness this year. The decline in house prices is attributed to noise in the data around the end of the stamp duty holiday in April.

There is additional uncertainty heading into the Autumn Budget, where the government is expected to increase the tax burden in the UK. More important for a housing recovery is a decline in mortgage rates in the medium term. Affordability is stretched but improving, and if the government avoids driving bond yields higher, mortgage rates could fall further.

Fair value estimates for homebuilders were lowered in the second quarter, but shares remain attractive. The government’s fiscal position uncertainty has weighed on shares, potentially impacting demand and fiscal room for stimulus. Homebuilders are operating well despite the challenges, as seen in Barratt Redrow’s full fiscal-year 2025 results.

Persimmon offers the greatest leverage to a recovering UK housing market. The company is exposed to lower-value housing and first-time buyers, making it well-positioned to capitalize on increasing homeownership rates. Despite a lower fair value estimate, Persimmon’s share price does not factor in the potential for cyclical earnings recovery.

Read more at Morningstar: Ahead of the Autumn Budget, UK Housebuilding Stocks Look Attractive