View from Vox: whatever happened to safe as houses?
British households may start having to get used to something we haven’t seen for a long time: consistently falling house prices. According to the latest data from lender Nationwide, prices fell 1.1% in February, the fastest drop since 2012 and the sixth consecutive month of declines. With prices now 3.7% below their peak, it also marked the first time that prices have been lower than a year earlier in the three years since Covid first struck.
It certainly seems that the housing market is struggling for oxygen, since peaking in August after an extraordinary run in the post-pandemic period brought to an abrupt end by last September’s mini-budget chaos. Although relative calm has now returned to the Treasury, the housing market just can’t seem to shake off the hangover.
That, of course, is the problem with long-periods of low interest rates that boost all asset prices – it’s painful when the monetary policy punchbowl is withdrawn. Although mortgage rate have fallen back since the mini-budget spike above 6.5%, even at 4% rates remain well above the lows.
That’s particularly bad news for first time buyers, whose average mortgage payments are now well above 50% of take-home pay and whose ability to save for a deposit has also been massively curtailed by the cost-of-living crisis. And with more than half of mortgaged properties bought by first time buyers last year, that’s bad news for the overall market. At 9 times average earning, housing affordability hasn’t been as stretched since the Victorian era.
Those pressures are showing up clearly in results from () and () this week, confirming the slowdown revealed across a slew of trading update from the sector in January. Although both builders reported strong trading in 2022, this year’s outlook has given investors cause for concern.
Persimmon’s shares slipped 10% on results day after it said that lower ongoing reservation rates meant legal completions in 2023 were likely to be between 8-9,000, well below the 14,868 reported last year. Taylor Wimpey predicts completion of 9-10,500, again a significant drop from the 14,154 delivered in 2022.
Their response is, sensibly, to slash build rates – although, as if the weakening economic backdrop wasn’t enough for the industry to contend with, a CMA enquiry announced this week into the sector could bring them into conflict with a government keen to build more quality and affordable homes.
The big question, of course, is whether the bad news is already in the price. The sub-sector has been carried along with the broad market recovery since October, but share prices are still well below their post-pandemic highs. Persimmon’ shares are now down over 60% since last summer after the fall this week.
That reflects the big fall in profits expected this year, but as broker Edison pointed out this week, leaves every stock in the sector trading at discounts to book value – a common ratio used to value housebuilders - “at levels rarely seen in the last ten years [which] implies an attractive entry point to the sector for investors searching for value”.
It argues that pressures on the sector are abating, not least build cost inflation, and that the possibility of falling rates as inflation ebbs away could breathe renewed life into the industry. Persimmon and Taylor both reported a return to more normal trading metrics in recent weeks, including lower cancellation rates and firmer pricing on forward sales.
And while the criticism of the industry that the CMA is addressing isn’t without merit, not least around build quality and land banking, housebuilders still have a key role to play in delivering the homes the country needs to plug the nationwide shortfall – policymakers must be careful not to bite the hand that feeds it.
As Edison points out, that suggests that there is indeed long-term upside in the sector as sentiment and metrics such as returns on equity and operating margins improve. But investors still shouldn’t buy the sector indiscriminately – how housebuilders cut their cloth to cope with market conditions, and deal with the inherent political risk in the market by delivering affordable and environmentally-friendly homes under the Future Homes Standard is now key. And on that front, the dust is far from settled yet.
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